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Are Holiday Office Parties Deductible?

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Are Holiday Office Parties Deductible?

Ask The Taxman: Are Holiday Office Parties Deductible?

Holiday parties are traditionally held for employees, clients or both.  The deductible of the expenses for these parties is completely dependent on the guest list and the purpose of the party.

How Are Employee Holiday Office Parties Treated?

IRS makes an exception to the standard 50 percent for meals and entertainment rules as it applies to recreational or social activities for employees, such as a company-wide holiday party or picnic. The expenses incurred as a business owner are 100 percent deductible, as long as the event is held primarily for the benefit of employees (including their spouses) who are not highly compensated.  These type events are tax-free to the employees. This means that you must extend the invitation not simply to executives and higher-level employees, but all the way down the organizational hierarchy.

How Are Non-Employee Holiday Office Parties Treated?

If the party you are holding includes customers, prospective clients or any other business-related associates, it is subject to the 50 percent deduction limitation. In contrast to holiday parties and activities thrown for employees, which do not require a business motive, you must be able to show the meal or entertainment was conducted for the purpose of benefiting your business.

How Are Combined Holiday Office Parties Treated?

If your holiday event features both employees and non-employee business associates, you must do a reasonable allocation based upon the attendees.  To avoid any potential scrutiny, I would suggest you conduct these events separately, unless there is some strategic advantage to combine them.

As with any deductible expense, make sure you keep contemporaneous (at or near the time of the event) detailing the method/proof of payment and what was purchased (receipt).  In the case of office or client parties or events you will also want to retain a copy of the guest list.

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