Company Holiday Parties: Celebrate the Tax Breaks

04 November 2024

Are the costs of holiday parties tax deductible? Despite a recent crackdown on business entertainment expense deductions, your company's holiday bash may still qualify for write-offs for the 2024 tax year. You might even be allowed to write off the entire cost, unlike most other meal and beverage deductions. Understanding the rules will help you avoid potentially costly missteps.

Unwrapping the Tax Rules for Holiday Gifts

Some companies give their employees gifts in lieu of, or in addition to, holiday parties. Cash or cash-equivalent gifts generally are deductible for your company, but they're taxable to employees. For example, year-end bonuses are taxed as regular wages. If you give gift cards or similar items, they're also treated as taxable income to employees.

On the other hand, gifts of relatively minor value made to employees, such as traditional holiday turkeys or hams, are considered de minimis fringe benefits. Your company can deduct these gifts, and employees aren't required to include them in taxable income. Under current law, there's no specific dollar limit on de minimis gifts. However, the IRS has previously said that gifts valued under $100 are generally tax-exempt.

Are Holiday Party Costs Deductible?

Prior to enactment of the Tax Cuts and Jobs Act (TCJA), businesses could deduct a portion of their qualified entertainment expenses, such as sporting event or concert tickets for clients following contract negotiations. Generally, write-offs were limited to 50% of the cost. So, if an outing with your clients cost you $500, you could deduct $250.  

However, the TCJA permanently eliminated the deduction for entertainment expenses, starting in 2018. Yet a special exception remains: If your business throws a company-wide party for its employees, it can deduct 100% of the cost if certain conditions are met. Examples of expenses covered by the special exception include:

• Food and beverages,
• Decorations,
• Venue and furniture rental fees,
• Prizes and giveaways, and
• DJ or live band costs.

Important: The party can't be "lavish and extravagant." And you must invite your entire staff — not just your management team. If you don't meet this condition, you forfeit the whole deduction.

Also be advised that if your entire staff consists of family members, you can't deduct expenses for your company's holiday party. Under the family attribution rules, the IRS considers this the same as throwing a party for just your owners or officers.

Are the Costs Related to External Attendees Deductible?

You might want to invite others to the party, such as friends, family members, clients and business associates. However, expanding your guest list complicates tax matters.

For instance, suppose a company hosts a party at its office in December 2024. All 55 full-time employees and their spouses or significant others are invited. Out of this group, 80 people attend the party. In addition, the owner invites five close friends, three business associates and two independent contractors, as well as their plus-ones. All 20 people from this group attend the party. The tab for the 100-person party is $10,000 — an average of $100 per person.

How much of the total cost can the company deduct on its 2024 corporate return? It can write off $8,000, or the cost attributable to employees and their significant others ($100 times 80). The cost attributable to the 20 social guests ($2,000) is considered personal and, therefore, isn't deductible. Even though independent contractors may perform similar duties as in-house personnel, they're considered social guests because they're not employees.

Important: Under prior law, you could have deducted 50% of the cost attributable to the three business associates, two independent contractors and their plus-ones, or another $1,000 ($100 times 10). However, this portion is no longer deductible because the TCJA repealed entertainment expense deductions. So, from a tax perspective, the fewer social guests you invite to your holiday soiree, the better.

How Can You Safeguard Your Deductions?

Maintain detailed records and receipts of all expenses to support your holiday party write-offs, like you do for other business-related deductions. The IRS will likely request this documentation if it challenges your deduction. To help avoid IRS scrutiny, remember to keep your costs reasonable based on your company's size and to minimize "personal" invitations.  

If you have questions about tax deductions for your company's upcoming holiday party, seek professional tax advice. Your advisor can explain the appropriate tax treatment and recordkeeping rules under current tax law.

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