Entertainment for tax purposes can include a variety of different types of activities, including meals as a form of entertainment; entertaining guests at social, athletic or sporting events; hunting or fishing trips; in theaters and nightclubs; and can also include meeting the personal, family, or living needs of individuals, such as by providing meals, hotel rooms, or a rental car to clients and customers or their families. But you will need to meet the directly-related and associated tests below.
As in the case of meals, entertainment expenses must not be lavish or extravagant, and must be reasonable under the circumstances. But there is no fixed dollar amount established.
If you are entertaining business and personal guests at the same event, you will have to divide the expenses. You can divide the total expense on a pro rata basis by person if it is not possible to determine a more precise breakdown. Expenses for taking turns paying for meals or entertainment among a group of business associates are generally not deductible if no specific business purpose is served.
50% Limit
Generally you can deduct only 50% of your un-reimbursed entertainment expenses. These expenses must be ordinary and necessary and must meet either one of two tests:
Directly-related test
Associated test
Directly-related Test
To satisfy the directly-related test, the entertainment must have taken place in a clear business setting, or the main purpose of the entertainment must have been the active conduct of business. You must have actually engaged in business during the entertainment, and you must have had more than a general expectation of getting income or some other specific business benefit. But you do not have to show that income or another benefit was actually received.
A clear business setting under the directly-related test may not be satisfied in situations where there are substantial distractions that generally prevent you from actually conducting business.