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This article will provide answers to the following questions:
- Is the office party tax deductible?
- How the employee recreation and parties look like after the TCJA Tax Reform?
- What kind of office parties can be tax deductible?
- How many costs you can deduct by organizing the office party?
- Who are the employees?
Is the office party tax deductible? How many costs you can deduct by organizing the office party?
When you know the rules, you can party with your employees and deduct 100 percent of the cost. Interestingly, if you feed your employees during a training program, your deduction is only 50 percent. Make sure you know the rules that give you the 100 percent deduction for employee entertainment.
What kind of office parties can be tax deductible?
The IRS says that the following types of entertainment qualify for the 100 percent employee entertainment tax deduction:
- Holiday parties, annual picnics, and summer outings
- Maintaining a swimming pool, baseball diamond, bowling alley, or golf course
The IRS makes it clear that the above are examples and that other types of entertainment may also qualify for the 100 percent entertainment deduction.
The tax code states that “expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees” qualify for the 100 percent deduction.
Who Are These Employees?
Technically, the law requires that the entertainment expenses be primarily for the benefit of employees other than a “tainted group.” The tainted group consists of
- a highly compensated employee (an employee who is paid more than $125,000 in 2019);
- anyone, including you, who owns at least a 10 percent interest in your business (this is called a “10 percent owner”); or
- any member of the family of a 10 percent owner, i.e., brothers and sisters (including half brothers and half sisters); spouses; ancestors (parents, grandparents, etc.); and lineal descendants (children, grandchildren, etc., including adoptees).
As the business owner, you belong to the tainted group. That’s not a big deal. You just need to make sure that partying with the employees is primarily for the benefit of the employees.
The words “primary” and “primarily” mean “more than 50 percent.”
In tax law, the words “primary” and “primarily” mean “more than 50 percent.” For employee recreation, that means the untainted group of employees has to have more than 50 percent use of the entertainment facility, or in the case of a party, a majority of the attendees come from the untainted employee group.
Documentation tip. You can measure “primary” by days of use, time of use, the number of employees, or any other reasonable method. Regardless of how you measure use, the keys to your deductions are the records that prove the uses.
The Employee Retention Credit (“ERC”) has had some upgrades and retrofits to some of the basic calculations with the most recent (12.27.20) CARES Act changes.
We are glad to inform you that Justin Prusiensky, Chief Executive Officer of the GP CPA P.C. was featured on WCNC Charlotte coverage about “Are Unemployment Benefits Taxable”. If you missed it on TV, you can watch a video featuring GP CPA on the WCNC Charlotte website.
Congress extended some of the tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020. Learn more about tax breaks that have been extended.
GP CPA offers a wide range of business advisory services that are tailored to the needs of business owners. For those small businesses who need someone to keep the books, we can do that.
Take control back from the big box payroll companies and work with someone who can guide you to a better payroll process. GP CPA + GUSTO is the modern way payroll runs and the partnership that moves your business forward.