Spread holiday tax cheer

QTA Consultants, Ltd./Renata Bliumaite

Could your staff use a boost in morale?

Strategy: Host a holiday party. Not only can this lift the spirits of employees, but you can also cash in on a special tax break for employerpaid get-togethers. In fact, despite a recent crackdown on entertainment expense deductions, you still may be able to write off every penny you spend on a company party!

Here’s the whole story: Back in the day, you could generally deduct 50% of entertainment expenses that were “directly related to” or “associated with” your business, including costs for entertainment facilities. For instance, you could write off 50% of the cost of treating a client to drinks and dinner following a substantial business meeting, even if you never discussed business during the entertainment outing. However, the Tax Cuts and Jobs Act (TCJA) generally eliminated deductions for entertainment expenses, beginning in 2018. What’s more, unlike some of the other TCJA changes that are temporary in nature, this one is permanent. Nevertheless, you can still squeeze through a tax loophole. Thanks to a long-standing exception to the rules, you may deduct 100% of the cost of a holiday party—in other words, the full cost—as long as the entire staff is invited. And the TCJA didn’t touch this special exception. It remains on the books. However, the party can’t be restrictive, so you’re not allowed to limit the gathering to higher-ups or exclude lower-level workers. What if you invite all the employees but add a few people who aren’t employed by the company? This changes the tax outlook slightly. You cannot deduct the part of the cost attributable to these “social guests.” Example: You’re throwing a holiday party at your workplace in late December. As per the tax law requirements, you’re inviting the entire staff, as well as extending invites to their significant others. Eventually, 45 people, including you and your spouse, RSVP that they’re coming. But you also expect five close friends of yours to attend. The total number of people at the party will be 50, of which five are treated as social guests. Based on these facts, 10% of the cost of the party is nondeductible. Say the party costs your company $10,000—your business can write off $9,000, which is still a healthy sum.

Caveat: You can’t go over the top. If the IRS deems the party to be “lavish and extravagant” under the circumstances, your deduction may be denied. With that in mind, here are three tips to follow when planning a company holiday party.

1. Keep the social guest list down. Remember that the costs attributable to these people are nondeductible.

2. Keep it reasonable. The IRS doesn’t say exactly what constitutes “lavish and extravagant,” but you should know when you’re pushing the envelope.

3. Keep detailed records. This is the best proof you can have if the IRS ever challenges your deduction.

Tip: There’s no annual limit on the number of parties that can take advantage of these rules, so you still can benefit from this tax break if your company already hosted another event in 2023, say, to celebrate Labor Day.

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