Entertainment expenses are costs incurred by employees to entertain business colleagues and generate income for employers. Tax codes define what expenses can be deducted from taxable income, and entertainment expenses must be incurred in a business environment or for the purpose of conducting business. Tax agencies limit the use of this category to prevent abuse, and the IRS in the US only allows a 50% deduction. Companies must document expenses to claim deductions.
In the business context, entertainment expenses are the costs employees incur to eat and occupy themselves and business colleagues while working to generate income for employers. This can include money spent on nurturing customers, such as taking a prospect out to lunch or interacting with a target group over a round of golf. This category is often important for tax purposes, as many jurisdictions allow businesses to deduct this type of expense from income before determining taxable income.
Many countries require corporations to pay income taxes as independent entities, in the same way that individuals pay taxes on earned wages. The jurisdiction’s tax code defines the types of expenses that may reduce a company’s taxable income. These business expenses are usually grouped into categories to simplify accounting. While the entertainment expense category could theoretically contain anything related to the topic, it should only contain expenses authorized by the tax code if a business wants to use the category as a business expense deduction.
Tax codes differ by jurisdiction. The formal definition of entertainment expenses for tax purposes also differs. There is an international effort to standardize business accounting rules across jurisdictions that have normalized definitions of expenses and deductions to some extent. Differences persist, of course, but the treatment of entertainment expenses in a major jurisdiction such as the US is a reasonable example of how the expense category is treated in general.
Entertainment expenses are typically defined as any expense that provides entertainment, amusement or recreation to entertain a customer, customer or employee as a necessary part of generating business revenue. These expenses may include meals. To treat these expenses as business deductions, they must be incurred in a business environment or with the express purpose of conducting business. Expenses cannot be included in another category of business expenses, such as travel, and cannot be lavish or extraordinary.
Government tax agencies try to limit the use of the entertainment expense category because it is subject to abuse. Sometimes companies try to classify any type of entertainment as a business expense and use the category to discard unnecessary or personal entertainment. In the US, for example, the IRS only allows a company to deduct 50% of the entertainment expenses it claims. It also requires companies to document expenses by tracking the amount of the expense, the date and place it was incurred, and the business relationship of the person involved.
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