As of today, September 4, 2025, understanding the deductibility of entertainment expenses for the 2023 tax year is crucial. Generally, entertainment expenses faced limitations.
Table of contents
General Rule
Generally, entertainment expenses are difficult to fully deduct. Section 32-5 of ITAA97 often denies deductions, categorizing them as entertainment.
Specific Scenarios (2023)
- Entertaining suppliers/bankers: A 50% deduction was sometimes allowable.
- Entertainment allowance to employees: A 50% deduction was sometimes allowable.
- Entertaining employees: Generally, NIL deduction.
Trump Tax Plan Impact
The Trump tax plan significantly reduced the value of meals and entertainment tax deductions by 50% in 2023.
State-Specific Rules
Wisconsin, for example, allowed only a 50% deduction for entertainment, amusement, and recreation expenses in 2023.
Key Considerations for Deducting Expenses
For any expense to be deductible, it must be incurred wholly and exclusively for business purposes. Proper documentation is essential. Keep detailed records of:
- The date and place of entertainment
- The business purpose of the entertainment
- The names and occupations of the people entertained
- The amount of the expense
Exceptions and Special Cases
While the general rule limits deductions, there are some exceptions. These can include:
- Expenses treated as compensation: If entertainment expenses are treated as taxable compensation to an employee, they may be deductible.
- Recreational expenses for employees: Certain recreational expenses that primarily benefit employees may be fully deductible (e.g., a company holiday party).
- Business meals: Although partially deductible, business meals are subject to specific rules and limitations. The meal must be ordinary and necessary, directly related to or associated with the active conduct of your trade or business, and not lavish or extravagant under the circumstances.
VAT Deduction (If Applicable)
If Value Added Tax (VAT) applies to your business, the rules regarding VAT deductions on entertainment expenses can be complex and may vary depending on the jurisdiction. It’s important to consult with a tax professional to understand the specific regulations in your area.
Consult a Tax Professional
Tax laws are subject to change, and specific situations can vary widely; It’s always best to consult with a qualified tax professional or accountant to determine the deductibility of entertainment expenses for your specific business and circumstances. They can provide personalized advice based on the most current regulations and help you ensure compliance with all applicable tax laws.
