Employees are the life blood to a successful business so it’s no surprise that companies spend money to make them happy. However, it is important to know what expenses are 100% deductible and those that are not.
What Employee Recreation Costs Can You Write Off?
It is important to distinguish entertainment expenses, which are not deductible, from employee recreation expenses. Entertainment would include activities such golf outings, fishing trips and theater tickets for customers or their families. Additionally, dues or fees to country clubs, social clubs, athletic clubs used in connection to entertainment are not deductible.
On the other hand the IRS allows a 100% deduction for employee recreation. In their eyes these activities promote benefit employees and the overall mission of the business.
To be 100% deductible the employee recreation expenses should be:
- Ordinary and necessary
- Open to all employees
- Proof of the event (including date and location)
- Mainly for the enjoyment or benefit of the employees
Can You Write Off 100% of Holiday Party Costs?
Although company holiday parties during COVID may be limited, such events are popular among owners and HR departments because they help build bonds among employees.
It is important to know when recreation is not considered a business expense that can be written off. Disallowed expenses include those that are:
- Not for the primarily for the employees
- Exclusively for an employee (or family member) who owns at least 10% of the business
- Just for highly compensated employees
TIP: (For 2021 a highly compensated employee is someone who earns at least $130,000 annually).
CASE: Chris co-owns a software company with his brother. They all have equal ownership and are work in the business. The company has a total of 8 employees. Chris plays a round of golf with his brother at a local country club but does not invite the other employees.
In this case the golf fees are not deductible.
CASE: Chris and his brother decide to take all the employees out to a scavenger hunt. They plan to use the event as a team building opportunity. The scavenger hunt lasts a day so Chris and his brother decide to buy everyone lunch.
The cost of the lunch and scavenger hunt can both be written off as employee recreation expenses.
TIP: It’s a good idea to separate employee recreation meals that are 100% deductible from business meals that are 50% deductible.
When these types of expenses are incurred it is important to not only save receipts but also document the activity as well as the employees who attended.