Entertainment expenses that are both ordinary and necessary may be deductible if they meet one of the following two tests:

• the directly–related test, or
• the associated test.

You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.

This deduction is generally limited to 50% of the expense. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. This includes entertaining guests at night clubs, social events, theaters, sporting events, athletic clubs, on yachts, or on hunting and fishing vacations, and similar trips. The cost of a meal you provide a customer or client is deductible as entertainment (subject to the 50% limitation) only if you or your employee is present when the food or beverages are provided.

You must be able to show that entertainment expenses meet the directly–related test or the associated test.

For entertainment to meet the directly–related test, you must show that:

• You had more than a general expectation of getting income or some other specific business benefit at some future time;
• You engaged in business with the person being entertained during the entertainment period; and
• The main purpose of the entertainment was the active conduct of business.

For entertainment to meet the associated test, you must show that the entertainment was associated with the active conduct of your trade or business and directly preceded or followed a substantial business discussion.

None of the dues you pay for membership in any club organized for business, pleasure, recreation, or other social purpose is deductible, if one of the club's principal purposes is to conduct entertainment activities or provide access to entertainment facilities for members or their guests.

If you are an employee whose deductible business entertainment expenses are fully reimbursed under an accountable plan that meets the 3 accountable plan rules, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If you are not reimbursed under an accountable plan or your expenses exceed the reimbursement you received under an accountable plan, use Form 2106 (PDF), or, if you meet the conditions, Form 2106-EZ (PDF) to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Schedule A, Form 1040 (PDF), and are generally subject to the 2% of adjusted gross income limit. Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.

If you are self–employed, use Schedule C, Form 1040 (PDF), or Schedule C–EZ, Form 1040 (PDF) , or, if you are a farmer, use Schedule F, Form 1040 (PDF) to deduct these expenses.

For more information, refer to Publication 463.