Even if your entertainment expenses do not meet the directly-related test, they still might meet the associated test, and therefore be deductible. To satisfy the associated test, the entertainment must be associated with your trade or business, and the entertainment must have directly preceded or followed a substantial business discussion.
An expense will generally be considered as associated if there is a clear business purpose. This could be to gain new business or to maintain an existing business relationship. Whether there is a substantial business discussion will depend on the circumstances. You must be able to show that you actively engaged in a business discussion, but no specific length of time is defined, and you do not necessarily need to discuss business during the entire entertainment meal or activity.
Provided the entertainment activity is on the same day as the business discussion, it is generally considered to directly precede or follow a business discussion. If they are not on the same day, you will need to consider the circumstances, including place, date and time of the entertainment, possibly also taking into account the travel arrangements of your guests.
Expenses for spouses who attend an entertainment activity are generally not deductible unless the activity would be impractical without the spouses’ presence. In this case, their expense would also be deductible.
Dues and Memberships in Clubs
Dues and memberships in clubs in which the principal purpose is to provide entertainment activities to members and guests are not deductible. These include country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs that provide meals where business discussions can be held. But out-of-pocket expenses at such entertainment facilities, that are not for the use of the facility, may be deductible, subject to the 50% limit.
Exception for Charitable Events
The 50% limitation on entertainment expenses does not apply to tickets for charitable sporting events, even if you paid more than the face value of the ticket, if the main purpose of the event is to benefit a charitable organization, all the proceeds go to that organization, and volunteers perform substantially all the work at the event.