Employee outings and parties are commonly used to build a positive company culture and reduce employee turnover rates. They’re also opportunities for the boss to get a break from the daily grind, and for a CPA to claim additional deductions for the business. The tax savings for employee outings has indeed survived the Tax Cuts and Jobs Act (TCJA) reforms. However, there are some important rules to know.
The Types of Recreation that Qualify for the Deduction
It may be possible to deduct 100% of the cost of employee entertainment. However, it’s interesting to note that if you hold a training program for your employees and provide a catered lunch, you can only deduct 50% of the cost. The lesson? Talk to a CPA before attempting to deduct 100%. The IRS generally allows the costs of holiday parties and annual company picnics to be completely deducted. In addition, employers may be able to deduct the expenses for maintaining a company golf course, bowling alley, swimming pool, or baseball diamond. In order to qualify, these expenses must be primarily for the benefit of the employees.
The Determination of Primary Benefit
If the IRS challenges the deduction, the employer must be able to show that the expenses were primarily for the benefit of the employees. “Primarily” means more than 50%. In other words, an “untainted” group of employees must have greater than 50% access to the entertainment.
The Untainted Group of Employees
The IRS separates employees into untainted and tainted groups. It’s possible for “tainted” individuals, such as the boss, to party with the untainted group—as long as the untainted group has greater than 50% of the benefit. The tainted group includes the following people:
- 10% owners (anyone who owns at least a 10% interest in the company)
- Relatives of 10% owners (including spouses, lineal descendants, siblings, half-siblings, and ancestors)
- Highly compensated employees (any employee who is paid more than a certain threshold—$125,000 as of 2019)
Note that in the case of a company party, “primary” benefit is measured by the attendees. More than 50% of the attendees must be of the untainted group.
Not sure whether you can deduct your own entertainment expenses? Talk to The Royce CPA Firm to get personalized tax advice.