We just returned from a much-needed and well-deserved (if I do say so myself) company retreat.
We had an amazing time! And the icing on the cake is that the trip is 100% tax-deductible. In today’s article, I’ll share with you how you can deduct 100% of your employee recreation and parties, and I’ll be sure to share some of the deets from our trip as well.
Which types of employee entertainment is tax deductible?
The IRS doesn’t provide an exhaustive list of all possibilities. However, according to the IRS, “expenses for recreational, social, or similar activities” used “primarily for the benefit of employees” are deductible. This extends to any activities that are provided for your employees’ families as well. For example, all of the following will qualify for a 100% employee entertainment tax deduction:
- Annual picnics
- Holiday parties
- Summer outings
- Company retreats
- Maintaining facilities like a swimming pool or golf course
Since our employees work remotely all over the country, this year’s company retreat was held in Santa Rosa, Florida. We stayed together in a gorgeous Airbnb where it was so refreshing to enjoy each other’s company and discuss work processes in a relaxed setting. Other entertainment for our trip included airboat rides, a photoshoot, a bonfire on the beach, and mouthwatering meals. And all of this is deductible!
Are there limitations to the 100% deduction for employee entertainment?
Generally, if your employee entertainment meets the following criteria, then you can expect the entertainment to be 100% deductible:
- The entertainment is primarily for the employees (more about this below).
- The opportunity is available to all employees and there isn’t discrimination in favor of the owners and highly compensated employees.
- There is documentation as to who was entertained and when that entertainment took place.
- The entertainment passes the “ordinary and necessary” business purpose test (more about this below).
How do I show that the employee entertainment is “primarily for the employees”?
In order to meet this criteria, you’ll need to show that for more than 50% of the time, the entertainment expenses were not solely going to one of the following:
- A highly compensated employee (in 2021, someone making more than $130,000 per year);
- An employee that owns at least 10% of the business;
- Any family member of an employee who owns at least 10% of the business.
You’ll need to keep documentation to show who attended or who used the entertainment facility, when, and for how long (if that applies to your situation). If you’re planning a retreat like we did, you’ll be keeping track of your spending anyway, so just notating each receipt with an employee’s name is an easy way to document who received what.
How do I show that the employee entertainment is for an ordinary and necessary business purpose?
This is easier than it sounds. If the expense–in this case entertainment–is “appropriate and helpful” for your business, then it is deemed to be an ordinary and necessary business expense. Could you run your business without having a company party or retreat? Yes. However, if you are building or maintaining a business, providing employee retreats and parties is definitely necessary to:
- boost employee morale
- reward employees
- show appreciation to employees
- relieve employee stress
- spark employee creativity
- strengthen bonds between employees
- build pride in the company
- attract potential employees who want to have fun too!
Whatever your reason for providing employee entertainment, you’ll want to make sure you have it in writing as well. You can simply include this reasoning as a note on planning documents or receipts. I created an Excel spreadsheet for our retreat that included tabs for travel plans, itinerary, and meeting topics. This kind of documentation can serve many purposes, including acting as a record of your business purposes.
Do I need to keep any special accounting documentation to be able to deduct 100% of employee recreation and parties?
In your company’s chart of accounts, also called a company ledger, make sure you create a category for employee recreation. Here you should list all expenses related to the party, retreat, or outing. This could include food, lodging, travel, equipment, entertainment services, and anything else you purchased to provide entertainment for your employees.
It’s important to note here that while these types of employee functions are 100% deductible, if you’re providing these same types of entertainment to clients, those expenses are no longer deductible. Additionally, since business meals are only 50% deductible, you’ll want to keep accurate records to avoid losing out on half of your deduction for employee entertainment-related food and beverage purchases.
- Keep accurate records of who attended the party or participated in the event including when and, if possible, for how long.
- Document in writing your business purposes for providing the employee entertainment.
- Keep track of all expenses in a separate category in your chart of accounts. This category should only be used for 100% tax deductible employee recreation.
- Make sure you haven’t overlooked any other tax deductions for small business owners.
- Have fun with your employees! I know I sure did, and I can’t wait to do it again next year!