No need to hold back on the holiday office party if cost is the only thing stopping you: It’s entirely tax-deductible, as long as everyone’s invited.
That is one benefit that made it through the 2017 tax law, in which Congress scaled back or killed deductions for other kinds of meals and entertainment.
“This is one of the rare cases that not only do you have the full deduction but the law says you’re not being held back,” Ruth M. Wimer, a partner at Winston & Strawn LLP, said. “You can have the circus come in, or Maroon 5 come and entertain your people, and that’s deductible. It’s pretty crazy.”
Meals and entertainment expenses outside of holiday festivities and summer picnics changed significantly in 2018: Businesses can only write off 50 percent of the costs of employee lunches, for instance, and none of the costs of drinks and hors d’oeuvres or entertainment—unless they are all served up at a seasonal celebration to appreciate employees.
There is no specified limit or exception to what companies can do for their parties. Live bands, elegant cuisine, and boat parties with thousand-dollar bottles of wine appear to be acceptable.
“There doesn’t seem to be a written exception as to where the holiday party could be,” Kathy Petronchak, director of IRS practice & procedure at Alliant Group, said. “Would the IRS look at it and say, ‘You took a cruise for four or seven days, and that was your holiday party?’ They might question that.”
Even though the tax code doesn’t limit the number of recreational or social events a company can hold, “regulations do anticipate that it’s not a common event,” said David Auclair, national managing principal at Grant Thornton’s Washington National Tax office.
“You wouldn’t have your summer outing every month of the year,” Auclair added. “It’s tied to seasonal and significant events, mainly for business and holiday parties.”
Under tax code section 274(e)(4), 100 percent of the expenses for recreational, social, or similar activities that benefit all employees, from parties to facilities like a swimming pool or basketball court, can be written off.
But there is a caveat: The event or activity can’t be skewed toward only highly paid employees, which the IRS defines as those making more than $120,000. In 2019, the threshold rises to $125,000.
The general assumption is that all levels of a company’s staff must be included.
“If a law firm throws a party, and they don’t invite the secretary, it’s not going to cut it,” Wimer said.
The rules are a bit fuzzy though. A party for a group of managers making $119,000 could squeak past the provision.
There is very little case law and guidance on what satisfies the rules, Wimer and Petronchak said.
“I think this is going to be developed because it’s one of the last provisions standing,” Wimer said. “It’s one of the last ways to have some entertainment. I think it’s going to be examined more.”