'Tis the season to be jolly, but not too jolly at, as the song goes, the annual office Christmas party hop.
OK, Brenda Lee doesn't specify "office" party when she sings Rockin' Around the Christmas Tree, but that song is a standard at almost every holiday gathering of workers.
And you want to make sure that you make the right impression on the boss who's gone to the trouble to throw the soiree.
Of course, as today's second Christmas Tax Tip Tune notes, your employer also gets some help from Uncle Sam in staging the seasonal shindig.
Fully deductible office party: The cost of a holiday party for employees is fully tax deductible. Workers can even bring their spouses or significant others and the event is still a total business write-off for the hosting boss.
Just don't get too lavish. The Internal Revenue Service always keeps an eye on business deductions and the costs associated with an extravagant event, even at joyous Christmas time, could cause an examiner to take another, closer look at your company's entire return.
As boss, you might be tempted to invite your whole family to the office party. Don't. The deductible office party is thrown primarily for the benefit of your workers.
I know what some of you are thinking and the answer is no. You cannot get around this rule if all your employees are relatives.
"Under ownership attribution rules that apply to entertainment expenses, the law deems that your ownership interest applies equally to your spouse and children," says W. Murray Bradford, CPA. "Thus, if you own 100 percent of the business, so do your children and your spouse.
"In effect, you and your spouse and your children have become one person, and this one person is the owner. This one person may not go out and party alone and deduct the cost."
Partly deductible customer party: If, however, you invite customers, prospective customers or independent contractors to your party or hold a separate one for these folks, that falls under the meals and entertainment tax rules.
In this case, only half the cost of the event is deductible.
And while you don't need a business reason to deduct an employee holiday party's costs, to write off 50 percent of your non-employee party you will need to show that the event was either:
- directly related to the active conduct of your business, or
- associated with a directly related discussion that preceded or followed the party.
Basically, the IRS considers the party the same way it does when you take a customer to lunch and discuss business.
What if you have employees and clients at the same Christmas to-do? Your party cost deductions are proportional to the attendees; that is, they are based on the percentage of guests in each employee/spouse or customer/client category.
To substantiate your deductions, be they for an employee party or a business-based celebration, you do what you do at all other tax times: Document, document, document.
Save your receipts for all party expenses. Keep a list of attendees, noting names, addresses and in the case of clients, the business relationship. A guest book can help, as will photos and videos taken during the event.
Of course, although you're a great boss and you want everyone, employees and clients alike, to have a great time at your party or parties this holiday season, you also want to make sure you get the full tax benefits of being a good host.
So make sure you know and follow the rules. Then have fun!
You also might find these items of interest: