How to Make Your Business Party 100% Deductible

We may think that entertainment deduction is gone, but it's not. It went from 50% entertainment before to now. 100% deduction for the entertainment and the food. If it's the proper type of party,

Last year's Christmas party for our company, 100% write off.

It is your opportunity to have a company party during the holidays. Make sure it's must promote well being, morale and team building, not be lavish or extravagant. Must be primarily for employees, not owners. You get your 100%. Welcome, everybody, to the Main Street Business podcast. My name is Mark Kohler, here with my incredible partner, Matt Sorenson, and I am loving today's topic because this time of year there are so many cool strategies.

Yeah. And you're probably going to have a holiday party. Maybe you're a business owner and we want to talk about, is that deductible? Can you actually write this off and how do you make this an effective company meeting too? Let's include the holiday, but also have some business here.

Yeah. Yeah. So we want this podcast to live on in infamy during any time of the year because you might be having a summ party, you might be having a whatever party, Memorial Day barbecue.

I don't know.

Yeah, I was trying to.

Catalina Wine mixer, whatever. You, whatever parties you're throwing.

Halloween party. It's true. Our office goes nuts at Halloween. So you love it. But, but the point is, and I really wanted to talk about this with Matt because he's good at this. He really has a good feel for company culture, the vibe. Are we doing parties not just for the write off? Are they effective? Do people walk away clean? Better? Did we accomplish anything? Was it money well spent? Now I want, I want to make sure it's a freaking write off. And we're going to show you today and talk about how you can write off 100 of the costs, including food and entertainment for the proper company party. But I think there's a lot more to it than just that.

Yeah. I mean, we don't want to just spend money to get a write off. Like, there's lots of easy ways you can do that.

Write me a check.

Yeah. Call it legal, lawyers, visa, they're tax deductible. You know, 100. You know, just send us some checks. We'll, we'll give you some deductions back. So we want to use our money and our resources wisely in our business. But doing a company party where there's some business conducted, there's some recognition, we can go through some ideas here and maybe Go through a couple of examples of parties that we've done. We call them meetings in the book and the financials. It's a meeting.

Yeah, just client appreciation event or. I mean, sorry, employee appreciation. No, but parties is okay. Yeah, it's. But we do want it to be.

That's a business purpose.

Yes, we want to have something. We want to make sure it's more than a party and trick the employees into coming and then give them a lecture, you know. All right, so we're going to give you some case laws, some statutes, but let's start with the core rule and let's get us all on the same page in the Tax Cuts and Jobs Act. Many of you know there was a lot of good stuff in there. Bonus depreciation, writing off vehicles a lot more effectively, lots of updates in other areas. But the one thing thing we hated was to see the entertainment deduction gone. And it has not come back. I don't know if it ever will. But it was a 50% write off of any entertainment expenses with clients, employees, your owner, partners, whatever. Gone. So we may think that that entertainment deduction is gone in every aspect and way, but it's not the one area you can bring that entertainment deduction back and revive. It is, is inside a company party event that has entertainment for the benefit of the employees. It is 100% deductible. Well, that's the cool part. It went from 50% entertainment before to now 100% deduction for the entertainment and the food, if it's the proper type of party.

Yeah. I'll just give an example here. I was last year's Christmas party for our company, Main Street Business Services in Cedar City, Utah. And this was a Christmas lunch meeting. Okay. We went to the bowling alley. That's right, Cedar City.

Okay.

And of course we're having food, we're

eating to drink, maximum.

Yeah, yeah, yeah. We got some. There are some rules. There are some balance here.

Yeah. We're going to come to a couple of good stories, but.

And we're bowling. Everybody's having a fun time. But there was awards presented at that meeting. Okay. And everyone loved the awards. They're fun awards. We're going over. It's an opportunity to recognize people at the. At the party as well. But everybody's having a good time. This is actually during work hours. I want to talk about after work hours concepts here too. But this is employees only, by the way.

Yeah.

No spouses or anything on this. And that's pretty simple because we had definitely had business purpose There we're doing awards. We're talking about the year that we've had in the business. The food is the number one expense there. We don't want it to be. We want to be 100% deductible, not just 50% deductible. And because we had significant business purpose, it wasn't lavish or extravagant.

Yeah. One of the rules.

We'll tap into that too, because that can be a problem. We're. We're bowling.

Yeah.

Eating cheeseburgers.

Okay.

Yeah.

We're getting crazy.

But I'll say that fits the culture of that team and that business. They love that.

Yeah.

And that's a great way for them to mix and mingle, be in a more social atmosphere. We have some business recognition. We have a. You know, we had our own section over there. And of course the company's paying for it and taking a write off.

Yeah. Okay. Now, I love that we get an example on the table. Now, this is IRS code 274E4. There are three requirements to pull this off. And by the way, the doing something social and entertainment oriented is okay because you're building company morale and team building. And so the three requirements are it must promote well being, morale and team building. Number two, not be lavish or extravagant. And number three, must be primarily for employees, not owners. Now, I think we could probably pull off spouses and be okay, but what they're worried about is all the. The owners and their families are the ones there. Yeah, that's the majority of them there. That's where it's going to get shot down. But the company holiday parties, summer picnics, annual celebr, 100% deductible for the meals and the entertainment. Now, let's juxtapose it against the directed IRA Christmas party, which was a lot of fun. It was at a little more highbrow resort than a bowling alley. And we did one of those mock gambling casinos where they come in and everybody gets fake money and they can win prizes with how well they do at their gambling. It's a great place to learn craps because that's. Don't go to Vegas to learn craps unless you want to, like, get a new house. Yeah, yeah. Get another mortgage on your home. But. But any. It was a lot of fun. So we had kind of a more. Everybody wore suits, ties, a couple people in tuxes. I mean, it was kind of fun. And then again, we did. Yeah. More formal. And we did awards and recognized leaders and new employees and mission vision goals. I mean, for 20, 30 minutes. I mean, you don't have to do this for the whole party, but you need to be able to document there was a little structure, a beginning, a middle and end. 100% write off.

Yeah. And it's, you know, the, the purpose for many businesses is in doing a company event is to create camaraderie with the team. Right. When everybody's there during work hours. Right. It's business. Everyone's got their tasks, their role. They've got to succeed in the business. And at the company party, you're building this culture and people get in a more social atmosphere. In this we have. They bring their spouses, which adds another dynamic. They can meet the people that you work with. And you know, a lot of people in the interrected ira, right, they're friends outside of work. You know, they do things outside of work. You know, we've had people they like. They have a kickball team. Okay. I guess that's a thing. You know, they've had that in the past. And so a lot of them have social circles outside of work. And so they all connect at the company meeting. And I think it's probably not. Probably. It is a highly underrated value add to your business to have a strong culture and people who like being with each other, not just because it's their job, but because they actually like them. And a lot of companies, it's like, I think your people would actually like the other people that they work with. They've just never been in a relaxed social setting to get to know them. And so providing some opportunities for that. And I would say team building. And that company is. And just like the social camaraderie is the value being added from a business purpose more than the recognition and awards that we're doing there. Because we do recognition and awards at other events throughout for that, for directed IRA that we're doing. And we're. Those are off site too, and we're having food and those are other functions. But at the Christmas party, it is more social, which I think is still business purpose because it's building team culture, camaraderie. Take any executive or peace person running a company and they'll tell you what's the number one thing of the business and having it be successful. They'll be like, culture, culture, culture wins.

Yeah, yeah. And it's such a nebulous intangible too. When you've got it, you know it. When you don't, you know it. How do you get it? Who the hell knows? You know, it's like nuts all right, now let's. Let's compare this to something that is a 50% write off. Let's say on a Friday afternoon, once a month or whatever, you have kind of the linger longer or the little social gathering at the bar across the street, and the employees get an hour off early.

What did they call it around happy hour?

I thought there was something else that was called lately in our office.

A linger longer.

I don't know any of our team. What do we call when we go out after on a Friday night? Apparently they call this happy hour in some cultures. I've never heard that. That's so odd. Okay, anyway, so no, I thought we. Dang it. I had a name for this a couple weeks ago. It was probably something dumb. Okay. When you go out once a month, once, maybe it happens way too often in other businesses, but every heads out to the bar after. But it's for the employees, and the company's picking up the tab. You can write off 50% of that. Employee meals are 50%. That includes the bar tab. But it's not an event, it's not a holiday, it's not a structured speech with a whatever, so you can still write it off. And a lot of companies do have kind of that happy hour once a month a thing on a Friday afternoon. Everybody gets off an hour early. Create camaraderie, some culture. But that is only a 50% deduction. So carving out these events that are less frequent and around a special date, I think is the key for that strategy. I think.

Yeah. And adding in business purpose, I mean, that's really the trick here, is business purpose. Besides, just we're not at work, we're, you know, at happy hour. Or even like the snacks in the kitchen, right? Like, or the food in the kitchen. Or we brought in pizza today, you know, that's 50%.

Yeah.

Right. Because it's really just, here's some food or here's some drinks, you know, or food. But if it's centered around a meeting and business purpose, where now the food is there, now that food becomes 100% write off.

Yeah. Now, next, strategy. Some of you are familiar with the Augusta rule, sometimes abused in circles in the tax planning community. And basically what it is is you're gonna rent your home to the business up to 14 days a year and take a tax deduction in the business. And it's tax free income to you, the homeowner, the owner of the business. Now, it's fraught with abuse, but it's also very. It's used on A regular basis legitimately. Now this is one that's perfect. I actually was trying to lobby Matt on this last year. He's got a cool pickleball court in his backyard. And I was like, let's do party at your house. And we'll, we'll have food brought in, catering, no extra work, cleaners, whatever. And for a variety of reasons, didn't work. But he has a, he's got an awesome backyard. But that would be an opportunity to say, okay, we're going to rent the home from Matt instead of a hotel, which is totally, you know, logical. And you'd go out on the Airbnb circuit or whatever and find out what would a similar home run me to get for. Because most people don't rent. Do a one day rental for this reason. So you. For a couple of days and then, you know, decorations, all those goodies. But that would be an opportunity to take an additional tax deduction. So you hold it at home, reimburse yourself for the use of your home, get a write off in the company at 100%, put it on the rent line, FYI. And then you have your event expenses on top of that. You can have a DJ.

Yeah.

You have entertainers. We can have food and 100%.

Yeah. So for those of you that have said, I do this at my home already, why aren't you taking a write off for it? I was on the side of, do I really want to use some bullets on this? So to speak with my wife and be like, let's have the company party at our house. Yeah.

Matt's like, I've got a few bills I can cash in. I don't know if I'm gonna cash in on this one.

Yeah, that's not the one. You know, so. And honestly, I have a complex about having people at my house, but that's another personal problem.

So I tried to get them in the therapy on that one.

Yeah.

Like, people love to see that you're. We. You're a fearless leader.

I know, I know. Well, let's be honest.

Okay.

We had Mark and Patty over to play pickleball on our pickleball court.

Oh, no. Okay.

Okay. So. And they, they came over in these obnoxious Christmas. This is a couple Christmases ago. Outfits, like, with like, like hats.

We had our Saturday Night Live cheerleader outfits on.

It was, it was like never again.

What? Yeah, I thought we, I, I got

a write off for that.

I thought I brought the fun on that one. Yeah. Whenever we win a point, there was some very.

They Had a whole dance and everything. It was just, you know, we got

in their heads, people. That's what you got to do. Pickleballs. It's all mental.

We've been playing since, though, so we're ready for a rematch.

Yeah, we do need one. We got one.

But anyways, if you hold it at your house, you can get a ride off for it. And you know, obviously when you're holding it at any place, you know you're going to have an event center. Right. We're paying for these places where we're going for the company events. And it's not cheap to get the right type of event. And then you, your home might be a great, great fit for that. For many of you business owners, particularly small business owners, do you have a team of 10 or 20 or less? I think that could be a. I love it.

Now let me throw out a few supporting cases for those that want to check out and do more research on this. There's the Southern Sutherland Lumber case. That's a seminal case that went to tax court that said we're, we're having a recreational event. And the IRS is like, no, you can't write that off. And they were able to show it had indirect goodwill to create that culture and won that case. So that was one that started to open up the door even more. So Reid vs. Commissioner, American Business Service Corp. Regal Inc. And IRS argued again, entertainment should not be deductible. Court held it was primarily for employees, so it's fully deductible, period. So it was a great one. Now let me give a couple other examples to give you some.

Let me say on those cases, the key part is you're making the business case for this. And another critical component is our employees are there. If you're like, well, it's just me, the business owner and my spouse. This is our company party. And on all this meals and stuff, it's going to be tricky to pull that off if the employees aren't invited.

Yeah. Now there's another good one. There's so much in here. I mean, Jolie, we want a good article on this because this is going to be really good. Client appreciation Christmas party 50%. So these, all these carve outs are for your employees because you're building your business. You're creating that camaraderie, the morale, all that culture. But with customers, if you want to have a Christmas party, 50%. So very different rule there. A partner retreat at a resort. And I have to say, Matt and I abused this one to its fullest for many years. Now the rule is you only write off 50% of the meals, no entertainment. Oh my gosh. Matt and I had a list of ones I love. The one I quote all the time I love is when we went fly fishing in, in central Utah and stayed at the Butch Cassidy resort or hotel and looked over at Butch Cassidy's home. That was a historic landmark. It was so fun.

Yeah. Now the meal was only 50% deductible, but it was like $13 I think for the ham and cheese sandwiches that we got from this little inn. So, you know, but the entertainment.

But the fly fishing guide, 150. So you could write it. We've done fishing and boating and entertainment games, football, baseball, everything. 50 in the good old days. No more zero. And the dining, 50%. But if we take employees and do some things that are interactive, we have a chance for 100%. Which brings to the last example. Taking everybody to a NBA game or out to a social event is not deductible that going out to a sports venue.

Yeah. I think with the trick there is you want to get it out of entertainment. Right. If you're just sitting there watching something like a concert or a sports game, it's going to be hard to say that was team building. You know, at least the cost of that ticket, the other costs and things around it you might do. You could have some argument for deductibility, but. But let's say it is like a interactive thing. Like let's say you go to an escape room or something like that. We've done that before. Right. That's. That has some entertainment aspect to it. But you're working together as a team, problem solving and stuff like that. So you can make an argument that was entertainment, that was team building. Yeah, I like culture, team building, communication.

Now here's another exception. Case law on this is a holiday party that' 80% employees, 20% clients. You get your 100%. So what you could do is invite your top tier clients to the company Christmas party which they might feel special about. Some of the employees may like, why are you going to ruin our party with the clients here? But as long as the majority is employees, you're going to be okay. And so that's where the spouse issue comes in. Or additional clients maybe. But you've just got to make sure you can document it was primarily for employees. And here was the agenda and outline. Yeah. So.

Yeah, so just keep in mind your meals always are 50% deductible unless you get the exception. Now these Always have to even get 50%. It's got to have business purpose. Of course. So you're meeting with a client, you're meeting with the team member, whatever it might be, partner, those are going to be 50% deductible. If I want to get outside of that. And I'm doing an event for the company, you can say party, I guess, but I like to say an event.

A meeting. Yes.

You know, meeting sounds too boring. Your people might not come to it. The. Yeah, the Christmas holiday event. Now that doesn't sound good either. Yeah, party.

Party's okay.

Have some business purpose to it, as I say.

Yes.

You know, so just like, you know, a mullet business in front part. And that's what the IRS sees. Party in back.

I like that. Behind, behind the curtain. And now obviously the last final tip, it should go without saying, but I will make sure you pay for all these expenses out of the company account. Start throwing around your debit cards and credit cards from other personal accounts to get this put together. Try to be very religious and strict with the company paying for these expenses. And I know in the smaller businesses we get a little more loosey goosey when you're going for 100%. Let's follow the rules on that one. Let's try to follow the straight and narrow. So with that said, I mean, we want to give you green light. It is your opportunity to have a company party during the holidays. Take 100 write off. There is a case out there. If you do invite and fly in your attorney, you do get a guaranteed 100% write off. So I mean we are available for any of those invites if you.

Bonus.

Bonus.

Write off.

That give speech can lay out the trifecta. You know, I did. Oh, on this note, I did try to make Matt's wedding a write off. May I share true story. Yeah, true story. I thank you. By the way, I was Matt's best man to get to. I think we had a couple best men in there.

But.

But I got to give a speech. It was two. It was me and Aaron. That was nice. So I had. I got the chance to give a speech, you know, at the wedding dinner. Now this, this took a lot of lobbying and political banter with his wife because she was like, hell no, we are not going to let Mark have the microphone. That's not a good idea, Matt. And so I had to assure her I would be good. That was under false pretenses, of course. So I got up to give my speech at the wedding and I had the hotel Staff ready to go. When I snapped my fingers and they brought up through the wedding party a whiteboard right up there in front of the wedding table. You know, whatever.

We're all up there with my kids, my, you know, new wife. We just got married. You know, we've been married for like 15 minutes now, you know, maybe an hour. All right. And then, you know, here comes Mark Kohler giving the best man speech.

So I had to bring up a whiteboard. I had my Sharpie ready to go. Maybe a little bit of laughter, maybe. I thought it was nice for effect. And I said, matt and Michelle, I'm going to give you the best gift possible for your wedding. We're going to make this a tax write off. So we turned it into a tax seminar right there. I went through the trifecta.

Explain the trifecta. A little left side, right side. You know, where are you putting your entities and how are we running our income and, and holding our assets? And people are just like that. Don't know. Mark, I do have some friends and family that are like, who is this guy?

They were taking notes, though. I mean, I, you know, I was handing out. I started to logo some of Matt's wedding tables, you know, nice gifts. No, I, I didn't, I didn't play it that long. I was. The routine.

It was hilarious. It was actually hilarious. It played very well. And I still did not take the deduction, though, so. I appreciate the offer, though, you know, have some business purpose there. I just felt like that would be a uphill battle with the address.

I, I wrote off my.

Did you write.

Yeah, you know, I have the, you know, the resort fee and all that and. Yeah, you know, but no, I, I played it for about 15 seconds and it was perfect. Michelle was, you know, just. It was like, you see that simmering and then. No, I'm just joking. She was wonderful. But anyway, so have some fun. Gosh, what was it the other day? One of my kids said, we got to get this. It was maybe my daughter's wedding in Mexico. They were trying to figure out how to make out a tax write off. It was funny. But anyway, I just love that we've created that culture in our family. Like, everything should be a tax write off. So your holiday party can be a write off, but make it effective. Have a good time and really work hard to create that culture as best you can. Any final words?

Yeah, no, that's what I was just going to say is we want to get the write off, of course. And at 100% have some business purpose to this and have some, whether it's awards or recognition, whatever it might be. Those are easy ways, I think, to make that happen. And then make it effective, though, what is your purpose? What are you trying to get out of that? Make it effective so that your team actually enjoys it and it's a party they're looking forward to. That helps build the culture, which is really what's more valuable, frankly, than the tax write off.

Well, thanks everybody for listening and enjoy your holiday. Travel safe, and we will see you next week for another episode of the Main Street Business Podcast. Trying to help you protect your assets, build wealth and save taxes. See you then.