Entertainment expenses are costs incurred by employees to entertain business associates and generate income for employers. Tax codes define what expenses can reduce a company’s taxable income, and the entertainment expense category must only include authorized expenses. Tax agencies limit this category to prevent abuse, and in the US, businesses can only deduct 50% of reported entertainment expenses. Documentation is required to track expenses and their business relationship.
In a corporate context, entertainment expenses are the costs that employees incur to eat and occupy themselves and business associates while they work to generate income for employers. This can include money spent on customer nurturing, such as taking a prospect out to lunch or engaging with a target group over a round of golf. This category is often important for tax purposes, as many jurisdictions allow businesses to deduct these types of expenses from revenue before determining taxable income.
Many countries require businesses to pay income taxes as an independent entity in the same way that individuals pay income taxes on earned wages. The jurisdiction’s tax code defines the types of expenses that can reduce a company’s taxable income. These business expenses are usually grouped into categories to make accounting easier. While the entertainment expense category can theoretically contain anything related to the subject, it must contain only expenses authorized by the tax code if a business wishes to use the category as a deduction for business expenses.
Tax codes differ by jurisdiction. The formal definition of entertainment expenses for tax purposes also differs. There is an international push to standardize business accounting rules across jurisdictions which has somewhat normalized the definitions of expenses and deductions. The differences persist, of course, but the treatment of entertainment expenses in a major jurisdiction, such as the United States, is a reasonable example of how the expense category is treated generally.
Entertainment expenses are typically defined as all expenses that provide entertainment, amusement, or recreation to entertain a client, client, or employee as a necessary part of generating business revenue. These expenses may include meals. For such expenses to be treated as business deductions, they must be incurred in a business context or for the express purpose of conducting business. Expenses may not be included in another category of business expense, such as travel, and may not be lavish or extraordinary.
Government tax agencies seek to limit the use of the entertainment expense category because it is subject to abuse. Companies sometimes try to classify any type of entertainment as a business expense and use the category to write off unnecessary or personal entertainment. In the United States, for example, the IRS allows a business to deduct only 50 percent of its reported entertainment expenses. It also requires businesses to document expenses, keeping track of the amount of the expense, when and where it was incurred, and the person’s business relationship.
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