December is right around the corner which means it’s time to start planning your office holiday party! Holiday parties are a great opportunity for you and your employees to bond and relax outside of work. But are office parties deductible?
Office Parties Are Deductible… Sometimes
Office parties in general can be deductible, but as is the case with most deductions, the IRS has certain rules you’ve got to follow to get those deductions. The rules can be a bit confusing. So what are the rules and how do you guarantee that your holiday party complies?
Who You Invite
The guest list is an important factor in whether your party meets deduction rules.
- Employees. Obviously you’re going to want to invite your employees to the holiday party – otherwise, what would be the point? But there are some caveats. For one, it’s important that you invite ALL of your employees. If you decided to only invite one department, or pick and choose, you may not be able to deduct the cost. As long as you invite everyone, the cost is 100% deductible.
- Employee Family or Partners. Inviting your employee’s significant others is also 100% deductible. They are considered an acceptable extension of your employee for deduction purposes.
- Customers, Contractors, Vendors, or Business Associates. Unfortunately, including these outsiders in your holiday party complicates things. In order for these groups to be included, the party MUST have a business focus. For example, you could reveal a new product or service during the party. Even so, the deduction for these attendees would only be 50% deductible.
- Family. If you invite your family members, there is no deduction allowed by the IRS even if the family member invited is an employee. The cost of a family member to attend would be considered a “personal” expense.
Keep Good Records
If you chose to invite a mix of all of the categories above, you would be responsible for dividing the expenses accordingly. That’s why it’s important to keep a record of all of your attendees and their relation to the business in addition to records of any expenses associated with the party.
You may also want to keep a record of the invitation sent to attendees. It’s also recommended that you make sure your invitation makes it clear that the party is for your business. For example, you could clearly label your invite as “[Business Name] Holiday Party.”
Extravagant vs. Ordinary
Everyone wants their holiday party to be fun for their employees. The last thing you want is for your party to feel like work. Your instinct may be to throw an elaborate party with door prizes, custom gifts, an extravagant meal, and a special performance, all hosted at the best venue you can find.
But for the sake of your deductions, this may not be the best idea. In fact, the IRS specifically says that your party cannot be considered “lavish or extravagant” based on your business type and circumstances. Maybe you have a large, thriving business and the scenario listed above would be considered ordinary. But in general, if you have a smaller business, do your best to throw a party in proportion with your company size.
Remember to Celebrate
Deductions are important – but so are the connections you have with your employees! Take the time to plan a holiday party that you and your staff will enjoy, keep appropriate records, and the rest will sort itself out. Take a look at how we celebrated this summer at our Encurio Summer Session for some ideas!