Main Street Business

#602 How to Write Off a Holiday Party for Your Business

• Mark J Kohler and Mat Sorensen • Episode 602

Share episode

Are you missing out on one of the easiest 100 percent deductions available to business owners? In this episode of the Main Street Business Podcast, Mark J. Kohler and Mat Sorensen break down exactly how to structure a holiday party or company event so it becomes a fully deductible business expense. From the IRS rules under Section 274 to real examples of what qualifies, you’ll learn how to turn food, entertainment, awards, and even venue costs into a legitimate write-off.

Unlike generic tax tips online, this discussion dives into real-world application for small business owners — whether you have a growing team, a handful of employees, or a small staff running from your home office. Mark and Mat explain the three requirements every event must meet, the difference between 50 percent and 100 percent deductions, why culture and team-building matter for tax purposes, and the exact documentation you need to protect the deduction. They also walk through case law, common mistakes, and creative strategies like using the Augusta rule when hosting at your home.

Whether you’re planning a Christmas party, a summer barbecue, a team-building event, or an employee appreciation night, this episode will help you use the tax code to your advantage while still creating an event your team will love. By the end, you’ll know how to design an effective, compliant, and fully deductible company party that strengthens your culture and saves you money.

You’ll learn:

  • How to structure a company holiday party or event so it qualifies for a full 100 percent tax deduction
  • The three IRS requirements under Section 274 that determine whether meals and entertainment are fully deductible
  • Real examples of deductible events, including award lunches, themed parties, off-site gatherings, and interactive team activities
  • How to document business purpose properly and protect your deduction if the IRS ever asks for proof
  • Creative strategies like using the Augusta rule when hosting at your home to increase deductions legally
  • Common mistakes business owners make when planning events — and how to avoid losing the write-off
  • How to maximize tax benefits while still creating a memorable, effective event your team actually enjoys

Get a comprehensive tax consultation with one of our Main Street tax lawyers that can build a tax strategy plan with an affordable consultation that will leave you speechless!! 

Here’s the link - https://kkoslawyers.com/services/comprehensive-bus-tax-consult/?utm_source=buzzsprout&utm_medium=description-link&utm_campaign=main-street-business-podcast&utm_content=msbp602-write-off-holiday-party

SPEAKER_00:

We may think that entertainment deduction is gone, but it's not. It went from 50% entertainment before to now a hundred percent deduction for the entertainment and the food if it's the proper type of party. Last year's Christmas party for our company 100% write-off. It is your opportunity to have a company party during the holidays. Make sure it's must promote well-being, morale, and team building, not be lavish or extravagant. Must be primarily for employees, not owners. You get your 100%. Welcome everybody to the Main Street Business Podcast. My name is Mark Kohler here with my incredible partner, Matt Sorensen. And I am loving today's topic because this time of year there are so many cool strategies.

SPEAKER_01:

Yeah, and you're probably going to have a holiday party. Maybe you're a business owner and we want to talk about is that deductible? Can you actually write this off? And how do you make this an effective company meeting too? Let's include the holiday, but also have some business here.

SPEAKER_00:

Yeah, yeah. So we want this podcast to live on in infamy during any time of the year because you might be having a summer party. You might be having a whatever party, memorial. BBQ barbecue. I don't know. I know I was trying to Catalina wine mixer, whatever you, whatever parties you're thinking about. Yeah, Halloween party. It's true, our office goes nuts at Halloween. So they love it. But but the point is the and I really wanted to talk about this with Matt because he's good at this. He really has a good feel for company culture, the vibe. Are we doing parties not just for the write-off? Is are they effective? Do people walk away feeling better? Did we accomplish anything? Was it money well spent? Now I want I want to make sure it's a freaking write-off. And we're going to show you today and talk about how you can write off 100% of the costs, including food and entertainment, for the proper company party. But I think there's a lot more to it than just that.

SPEAKER_01:

Yeah, I mean, we don't want to just spend money to get a write-off. Like there's lots of easy ways you can do that. Write me a check. Yeah, call it legal. They're tax deductible, you know, 100%. You know, just send us some checks. We'll we'll give you some deductions back. So um we want to use our money and our resources wisely in our business. Um, but doing a company party um where there's some business conducted, there's some recognition, we can go through some ideas here and maybe go through a couple of examples of parties that we've done. Um we call them meetings. Let's put that in the bookkeeping and the financials, it's a meeting.

SPEAKER_00:

Yeah, just party. Client appreciation event. Um or I mean sorry, employee appreciation. No, but parties is okay. Yeah, yeah, yeah. It it's uh it but we do want it to be a business purpose. Yes, we want to have something, we want to make sure it's more than a party um and trick the employees into coming and then give them a lecture, you know? All right, so we're gonna give you some case laws, some statutes, but let's start with the core rule. Um, and let's get us all on the same page. In the Tax Cuts and Jobs Act, many of you know there was a lot of good stuff in there, bonus depreciation, writing off vehicles, a lot of more effectively, lots of updates in other areas. But the one thing we hated was to see the entertainment deduction gone. And it has not come back. I don't know if it ever will, but it was a 50% write-off of any entertainment expenses with clients, employees, your owner partners, whatever gone. So uh we may think that that entertainment deduction is gone in every aspect and way, but it's not. The one area you can bring that entertainment deduction back and revive it is inside a company party event that has entertainment for the benefit of the employees. And it is a hundred percent deductible. Well, that's the cool part. It went from 50% entertainment before to now a hundred percent deduction for the entertainment and the food if it's the proper type of party.

SPEAKER_01:

Yeah, and I'll just give an example here. I was at last year's Christmas party for our company, Main Street Business Services, in Cedar City, Utah. And um, this was a Christmas lunch meeting, okay. We went to the bowling alley.

SPEAKER_00:

That's right.

SPEAKER_01:

Cedar City, okay. And um, of course, we're having food, we're eating, to drink maximum. Yeah, yeah. So yeah, we got some there are some rules, there are some bouts here.

SPEAKER_00:

Yeah, we're gonna come to a couple good stories.

SPEAKER_01:

Um, but and and we're bowling and everybody's having a fun time, but there was awards presented at that meeting. Yeah, okay. And everyone loved the awards, they're fun awards. We're going over it's it's an opportunity to recognize people at the uh at the party as well. But everybody's having a good time. This is actually during work hours. I want to talk about after work hours concepts here too. Um, but this is employees only, by the way. Yeah, no spouses or anything on this. And um, that's pretty simple because we had definitely had business purpose there. We're doing awards, we're talking about the year that we've had in the business. Um, the food is the number one expense there. Yeah, we don't want to be to be, we want to be 100% deductible, not just 50% deductible. Um, and because we had significant business purpose, it wasn't lavish or extravagant. Yeah, one of the rules. We'll we'll tap into that too, because that can be a problem. We're we're bowling, yeah. Eating cheeseburgers. Okay. Yeah. Um we're getting crazy. But I'll say that fits the culture of that team and that business. They love that.

SPEAKER_00:

Yeah.

SPEAKER_01:

And that's a great way for them to mix and mingle, be in a more social atmosphere. We have some business recognition. We have a little, you know, we had our own section over there. Um, and of course the company's paying for it and taking a write-off.

SPEAKER_00:

Yeah. Okay. Now I love that. We get an example on the table. Now, this is IR IRS code 274E4. There are three requirements to pull this off. And by the way, uh the doing something social and entertainment oriented is okay because you're building company morale, team building. And um so the three requirements are it must promote well-being, morale, and team building. Number two, not be lavish or extravagant. And number three, must be primarily for employees, not owners. Now, I think we could probably pull off spouses and be okay, but what they're worried about is all the employ the owners and their families um are only once there. Yeah, yeah, yeah. That's the majority of them there. That's where it's going to get shot down. But the company holiday parties, summer picnics, annual celebrations, 100% deductible for the meals and the entertainment. Now let's juxtapose it against the directed IRA Christmas party, which was a lot of fun. It was at a little more uh highbrow resort uh than a bowling alley. And we did one of those mock gambling casinos where they come in and everybody gets fake money and they can win prizes with how well they do at their gambling. It's a great place to learn um uh craps because that's don't go to Vegas to learn craps unless you want to like get a new get another mortgage on your home. But but anyway, it was a lot of fun. So we had kind of a more everybody wore suits, ties, a couple people in tuxes. I mean, it was kind of fun. And then again, we did, yeah, more formal, and we did awards and recognized um leaders and new employees and mission, vision goals. We I mean for 20, 30 minutes. I mean, you don't have to do this for the whole party, but you need to be able to document there was a little structure, a beginning, a middle, an end, 100% write-off.

SPEAKER_01:

Yeah, and it's um, you know, the the purpose for many businesses is in doing a company event is to um create camaraderie with the team, right? When everybody's there during work hours, right, it's business. Everyone's got their tasks, their role, they've got to succeed in the business. And at the company party, you're building this culture and people get in a more social atmosphere. In this, we have they bring their spouses, which adds another dynamic. They can meet the people that you work with. And, you know, a lot of people in the in directed IRA, right, they're friends outside of work, you know, they do things outside of work. You know, we've had people they like they have a kickball team, okay. I guess that's a thing, you know, they've had that in the past. And so a lot of them have social circles outside of work. And so they all connect at the at the company meeting, and I think it's probably not probably, it is a highly underrated value add to your business to have a strong culture and people who like being with each other, not just because that's their job, but because they actually like them. And a lot of companies, it's like, I think your people would actually like the other people that they work with. They've just never been in a relaxed social setting to get to know them. Um, and so providing some opportunities for that, and I would say team building and that companies is, and just like the social camaraderie is the value being added from a business purpose more than the recognition and awards that that we're doing there. Because we do recognition and awards at other events throughout for for that for directed IRA um that we're doing, and we're those are off site too, and we're having food, and those are the other other functions. But at the Christmas party, it is more uh social, uh, which I think is still business purpose because it's building team, culture, camaraderie. Take any executive or piece person running a company and they'll tell you what's the number one thing of the business and having it be successful, they'll be like culture, culture, culture wins.

SPEAKER_00:

Yeah, yeah, it is such a nebulous intangible too. You when you've got it, you know it. When you don't, you know it. How do you get it? Who the hell knows? Like nuts. All right. Now let's let's compare this to something that is a 50% write-off. Let's say on a Friday uh afternoon, once a month, or whatever, you have kind of the linger longer or the little social gathering at the bar across the street, and the employees get an hour off early. What did they call it around?

SPEAKER_01:

Happy hour.

SPEAKER_00:

I thought there was something else that was called lately at an RF.

SPEAKER_01:

A linger longer? I don't know. What do we do? Are any of our team?

SPEAKER_00:

What do we call when we go out after on a Friday night? Apparently they call this happy hour in some cultures. I've never heard that. That's so odd. Okay, anyway, so no, I thought we dang it, I had a name for this a couple weeks ago. It was probably something dumb. Okay. When you go out once a month, uh once maybe it happens way too often in other businesses, but uh everybody heads out to the bar after. But it's for the employees and the company's picking up the tab. You can write off 50% of that. Employee meals are 50%. That includes the bar tab. Um, but it's not an event, it's not a holiday, it's not a structured speech with a whatever. So you can still write it off. And a lot of companies do have kind of that happy hour once a month a thing on a Friday afternoon. Everybody gets off an hour early. Uh create camaraderie, some culture, but that is only a 50% deduction. So uh carving out these events that are um less frequent and around a special date, I think is the key uh for that strategy.

SPEAKER_01:

I think we're yeah, and adding in business purpose. I mean, that's really the trick here is business purpose besides just we're not at work, we're you know, at happy hour, or even like the snacks in the kitchen, right? Like or the food in the kitchen, or we brought in pizza today, you know, that's 50%.

SPEAKER_00:

Yeah.

SPEAKER_01:

Right? Um, because it's really just here's some food or here's some drinks, you know, or food. But if it's centered around a meeting and business purpose, um, where now the food is there, now that food becomes a hundred percent write-off. Yeah.

SPEAKER_00:

Now, uh, next strategy. Some of you are familiar with the Augusta rule, uh, sometimes uh abused in uh circles in the tax planning community. And basically what it is is you're gonna rent your home to the business up to 14 days a year and take a tax deduction in the business, and it's tax-free income to you, the homeowner, the owner of the business. Now it's fraught with abuse, but it's also very it's used on a regular basis legitimately. Now, this is one that's perfect. I actually was trying to lobby Matt on this last year. He's got a cool pickleball court in his backyard, and I was like, let's do the company party at your house, and uh we'll we'll have food brought in, catering, no extra work, cleaners, whatever. Um, and for a variety of reasons it didn't work, but um, he has a he's got an awesome backyard. But uh that would be an opportunity to say, okay, we're gonna rent the home from Matt instead of a hotel, which is totally right, you know, logical. And you'd go out on the Airbnb circuit or whatever and find out what would a similar home run me to get for because most people don't rent do a one-day rental for this reason. So you'd have to rent it for a couple days and then the you know decorations, all those goodies, but that would be an opportunity to take an additional tax deduction. So you hold it at home, reimburse yourself for the your use of your home, get a write-off in the company at 100%, put it on the rent line, FYI, and then you have your event expenses on top of that. You can have a DJ. Yeah, you can have entertainers, we can have food and 100%.

SPEAKER_01:

Yeah. So for those of you that have said, I do this at my home already, why aren't you taking a write-off for it?

SPEAKER_00:

Yeah, yeah.

SPEAKER_01:

Um, I was on the uh side of do I really want to, you know, you know, use some bullets on this, so to speak, uh, with my wife and be like, let's have the company party at our house.

SPEAKER_00:

You know, yeah, Matt's like, I've I've got a few bills I can cash in.

SPEAKER_01:

I don't know if I'm gonna cash in on this one. Yeah, that's not the one uh, you know. So and honestly, I have a complex about having people at my house, but uh that's another that's another personal problem.

SPEAKER_00:

So um I'm I tried to get him in therapy on that one. Yeah. I'm like people love to see that. You're we you're a fearless leader.

SPEAKER_01:

I know, I know. Well, let's be honest. Okay, we had Mark and Patty over uh to play pickleball on our pickleball court. Oh no, okay. Okay. So and they they came over in these obnoxious uh Christmas this is a couple Christmases ago outfits, like with like like hats.

SPEAKER_00:

We had our Saturday night live cheerleader outfits on week.

SPEAKER_01:

It was uh it was like never again. What? Yeah I thought we I thought.

SPEAKER_00:

I thought I brought the fun on that one. Yeah, whenever we win a point, there was some very We had a whole dance and everything.

SPEAKER_01:

It was just, you know.

SPEAKER_00:

We got in their heads, people. That's what you got to do. Pickleballs, it's all mental pickleballs.

SPEAKER_01:

We haven't planned since though, so we're ready for a rematch. Yeah, we do need one. We got one. But anyways, if you hold it at your house, you can get a write-off for it. And you know, obviously when you're holding it at any place, you know, you're gonna have an event center, right? We're paying for these places where we're going for the company events. Um, and it's not cheap to get the right type of event, and then you um your home might be a great, great fit for that for many of you business owners, particularly small business owners. Do you have a team of 10 or 20 or less? I think that could be a good fit.

SPEAKER_00:

Um now let me throw out a few supporting cases for those that want to check out um and do more research on this. There's the Southern Sutherland lumber case that's a seminal uh case that went um to tax court that said, We're we're having a recreational event, and the IRS is like, no, you can't write that off. And they were able to show it had indirect goodwill to create that culture and won that case. So that was one that started to open up the door, uh, even more so. Read versus commissioner, American Business Service Corp, Regal Inc. Uh, and IRS argued again, entertainment should not be deductible. Court held it was primarily for employees, so it's fully deductible, period. So it was a great one. Now let me give a couple other examples to to give you some.

SPEAKER_01:

And let me say on those cases, the key part is is you're making the business case for this, and another critical component is our employees are there. If you're like, well, it's just me, the business owner, and my spouse, this is our company party, and on all this meals and stuff, it's gonna be tricky to pull that off if the employees aren't invited.

SPEAKER_00:

Yeah. Now there's another good one. This is there's so much in here. I mean, Jolie, we want a good article on this because this is gonna be really good. Um client appreciation Christmas party 50%. So these all these carve outs are for your employees because you're building your business, you're creating that camaraderie, the morale, all that culture. But with customers, if you want to have a Christmas party, 50%. So uh very different rule there. A partner retreat at a resort. And I have to say, Matt and I abused this one to its fullest for many years. Uh now the rule is you can only write off 50% of the meals, no entertainment. Um, oh my gosh, Matt and I had a list of ones. I love the the one I quote all the time. I love is when we went fit fly fishing in in uh um central Utah and stayed at the Butch Cassidy resort or hotel and looked over at Butch Cassidy's home that was a historic landmark. Yes. It was so fun.

SPEAKER_01:

Yeah, now the meal was only 50% deductible, but it was like$13, I think, for the ham and cheese sandwiches that we got from this little inn. So, you know, I can't.

SPEAKER_00:

But the entertainment, but the fly fishing guide, hundred fifty percent. So you could write a we've done fishing and boating and entertainment, games, football, baseball, everything 50% in the good old days. No more, zero. And the dining 50%. But if we take employees and do some things that are um interactive, uh we have a chance for 100%, which brings to the last example. Taking everybody to a NBA game or out to a social event is not deductible. Yeah, that going out to a sports venue.

SPEAKER_01:

I think yeah, I think with the trick there is you want to get it out of entertainment, right? If you're just sitting there watching something like a concert or a sports game, it's gonna be hard to say that was team building, you know? Yeah um, at least the cost of that ticket. The other costs and things around it you might do, um, you could have some argument for deductibility. But um, but let's say it is like an interactive thing. Like let's say you go to an escape room or something like that. We've done that before, right? That's that has some entertainment aspect to it, but you're working together as a team, problem solving and stuff like that. So you can make an argument. That wasn't entertainment, that was team building.

SPEAKER_00:

Yeah.

SPEAKER_01:

That was culture, team building, communication.

SPEAKER_00:

Now, here's another exception. Uh, case law on this is a holiday party that's 80% employees, 20% clients, you get your 100%. So, what you could do is invite your top-tier clients to the company Christmas party, which they might feel special about. Some of the employees may like, why are you gonna ruin our party with the employee, you know, clients here? But as long as the majority is employees, you're gonna be okay. And so that's where the spouse issue comes in, or additional clients maybe, but you've just got to make sure you can document it was primarily for employees, and here was the agenda and outline. Yeah.

SPEAKER_01:

So yeah, so just keep in mind your meals always are 50% deductible unless you get the exception. Now, these always have to even get 50%, it's got to have business purpose, of course. So you're meeting with a client, you're meeting with the team member, whatever it might be, um, partner, those are gonna be 50% deductible. If I want to get outside of that and I'm doing an event for the company, you can say party, I guess, but I like to say an event, a meeting. Yeah, you know, meeting sounds too boring. Your people might not come to it. The the Christmas holiday event. Now that doesn't sound good either.

SPEAKER_00:

Yeah.

SPEAKER_01:

Um party parties okay. Um have some business purpose to it, as I say. You know, um so just like you know, a mullet, business in front, and that's what the IRS sees, party and back.

SPEAKER_00:

Okay, I like that behind behind the curtain. And uh now it's hundreds of things. Well, obviously, the last final tip, it should go without saying, but I will make sure you pay for all these expenses out of the company account. Don't start throwing around your debit cards and credit cards from other personal accounts to get this put together. Try to be um very uh religious and strict with the company paying for these expenses. And I know in the smaller businesses we get a little more loosey-goosey. When you're going for 100%, let's follow the rules on that one. Yeah, let's try to follow this straight and narrow. So um uh with that to said, I mean, we want to give you green light. It is your opportunity to have a company party during the holidays, take a hundred percent write-off. Uh, there is a case out there. If you do invite and fly in your attorney, uh you do get a guaranteed 100% write-off. So, I mean, we are available for any of those invites if you're bonus, the bonus bonus write-off. That was a speech. Could lay out the trifecta. You know, I did, oh, on this note, I did try to make Matt's wedding a write-off. May I share? True story. Yeah, true story. I thank you, by the way. I was Matt's best man to get to I think we had a couple best men in there, but but um, I got to give a speech. There's two, it's me and Aaron. But yeah, that was nice. So um I had I got the chance to give a speech, you know, at the wedding dinner. Now, this this took a lot of lobbying and political uh banter with his wife because she was like, hell no, we are not gonna let Mark have the microphone. That's not a good idea, Matt. And so I had to assure her I would be good. That was under false pretenses, of course. So I got up to give my speech at the wedding, and I had the hotel staff ready to go when I snapped my fingers, and they brought up through the wedding party a whiteboard right up there in front of the wedding table. You know, what do we call it?

SPEAKER_01:

We're all up there with my kids, my you know, new wife. We just got married, you know. We've been married for like 15 minutes now. You know, I don't remember an hour. All right. And then uh, you know, uh, here comes Mark Kohler giving the best man speech.

SPEAKER_00:

So I had him bring up a whiteboard. I had my Sharpie ready to go. Maybe you know, a little bit of laughter, maybe. I thought it was nice for effect. And I said, Matt and Michelle, I'm gonna give you the best gift possible for your wedding. We're gonna make this a tax write-off. So we turned it into a tax seminar right there. I went through the trifecta.

SPEAKER_01:

Explain the trifecta, a little left side, right side, you know, where are you putting your entities and how are we running our income and holding our assets? And people are just like that don't know, Mark. I do have some friends and family that are like, who is this guy?

SPEAKER_00:

They were taking notes though. I mean, I, you know, I was handing out. I started to logo some of Matt's wedding tables, uh, you know, nice gifts. No, I I didn't I didn't play it that long. I was uh the it was hilarious, it was actually hilarious.

SPEAKER_01:

It played very well, and I still did not take the deduction though. So I appreciate the offer though. You know, you have some business purpose there. I just felt like that would be a uphill battle with the IRS.

SPEAKER_00:

I uh I wrote off my uh did you write off your the you know, the resort fee and all that, and yeah, you know. Um, but no, I I played it for about 15 seconds and it was perfect. Michelle was, you know, just it was like you should see the simmering, and then no, I'm just joking. She was wonderful. It was fun. But anyway, so um have some fun. Um gosh, what was it the other day? One of my kids said, we got to get this. It was maybe my daughter's wedding in uh Mexico. They were trying to figure out how to make out a tax write-off. It was funny, but anyway, I just love that we've created that culture in our family, like everything should be a tax write-off. So your holiday party can be a write-off, but make it effective, have a good time, and um really work hard to create that culture as best you can. Any final words?

SPEAKER_01:

Yeah, no, that's what I was just gonna say is we want to get the write-off, of course, and at 100%, have some business purpose to this and have some, whether it's awards or recognition, whatever it might be, those are easy ways, I think, to make that happen. And then make it effective, though. What up what is your purpose? What are you trying to get out of that? Make it effective so that your team actually enjoys it and it's a party they're looking forward to that helps build the culture, which is really what's more valuable, frankly, than the tax write-off. Yeah.

SPEAKER_00:

Well, thanks everybody for listening and enjoy your holiday, travel safe. And we will see you next week for another episode of the Main Street Business Podcast, trying to help you protect your assets, build wealth, and save taxes. See you there.

Head Shot

Mark J. Kohler

Host