Most business owners know that certain entertainment expenses are deductible under some circumstances, but judging by the large number of questions I get on this topic, I don´t think many people actually know the rules.

Like all business deductions, entertainment costs must be “ordinary and necessary” in order to qualify. If your business is a used furniture shop, it´s not very likely that the cost of taking one of your customers to dinner and a movie would be an ordinary and necessary business expense. On the other hand, it could be, if for example the customer you take out for the evening is furnishing a motel and is prepared to spend $45,000 on furniture.

Here is the information Sara needs to record in order for the cost of taking Emily to lunch to qualify as a deductible business expense:

• The location — Mavis´s Downtown Country Cooking
• Names of people entertained — Emily (in “real life” you would want to include the person´s last name), owner Clean as a Whistle
• Date — November 8, 2006
• Business purpose — Discuss flex plan with business owner
• Amount spent — $35

Treasury Regulations state that this information must be recorded in a timely manner — in other words, you should record the information soon after the entertainment event rather than waiting until the day before an IRS audit.

The location, date, and amount spent are already on the receipt Sara gets from the restaurant, so all Sara needs to do is write Emily´s name and the business purpose somewhere on the receipt and make sure the receipt is properly filed.

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