Are entertainment expenses tax deductible, yes or no?
Every business has been there. The office Christmas party, the staff member’s birthday, the lunch with a major client. These are examples of business entertainment expenses.
Can you claim a tax deduction for entertainment? Probably not, but maybe yes. It’s a grey area and depends on four questions and a few specific rules – Why, What, Where and When. It affects Income Tax, as well as Fringe Benefits and Goods and Services Tax implications.
So, what is entertainment, and what isn’t?
Simple meals and refreshments provided at a business meeting or seminar, aimed at providing sustenance (e.g. sandwiches, muffins, biscuits, tea, coffee, orange juice), are seen as deductible expenses in the eyes of the ATO.
This is because sustenance is not entertainment. Meals on business travel overnight are not seen as entertainment either.
Having lunch with a client may seem to have a legitimate business objective. But a lavish three course meal, served with regular alcohol, between the hours of 2pm and 4pm on a Friday at a trendy restaurant, would suggest a more social than business motive.
Therefore, this example would be classed as entertainment, and would be non-deductible.
The four factors of Why, What, Where and When should tie together, and make sense. So, if a business lunch has the aforementioned 4 W’s supporting the notion of a business purpose, then it can be classed as non-entertainment.
So, while the days of claiming a deduction for lavish business lunches as per the 80‘s and 90’s era are gone, the 4 W theory opens an avenue for some business lunches to be tax deductible.