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By TERESA A. JUDYCKI, CPA

1. In addition to being ‘ordinary and necessary,’ entertainment expenses must pass another test to be deductible: they must be either directly related to or associated with your business.

2. A ‘directly related’ meal or entertainment either takes place in a clear business setting, or the main purpose is business and there is an expectation of specific benefit, not just goodwill. Business must actually be conducted — meeting, discussion, etc.
3. An expense is ‘associated with’ the conduct of business if the meal or entertainment precedes or follows a substantial business discussion and there is a clear business purpose which may be either to generate new business or to encourage continuation of a business relationship.
4. Lavish or extravagant entertainment is not deductible. The expense must be reasonable in light of the facts and circumstances.

5. The deduction for a skybox or a private luxury box rented for more than one event in the same sports arena is limited to the price of a non-luxury box seat for each seat in the skybox.

6. You cannot deduct more than the face value of a ticket to an entertainment event. This limitation applies equally to amounts paid to scalpers and service fees paid to ticket agencies.
7. Reciprocal meals or entertainment are not deductible (i.e. a group of business associates takes turns picking up the tab).
8. Once the expenditure qualifies, it is only 50% deductible. There are exceptions that include employee summer outings or holiday parties.
9. What about charity golf tournaments? If they qualify as entertainment expenses, charity sports events are not subject to the 50% disallowance as long as the primary purpose is to benefit a charity, the entire net proceeds go to the charity, and the event uses volunteers to perform substantially all the event’s work.

10. Strict substantiation rules must be met. The evidence must support the amount, time and place, business purpose (including the nature and duration of business discussions), and your business relationship to the person entertained.

Terri Judycki is a senior tax manager with the Holyoke-based public accounting firm