How to categorize entertainment expenses?

Entertainment expenses are costs related to activities intended to build or maintain business relationships, such as client outings, social events, or hospitality. While they’re part of doing business for many companies, most entertainment costs are no longer tax-deductible under current IRS rules, with a few specific exceptions.

What are entertainment expenses?

Entertainment expenses include spending on activities like meals, events, shows, or recreational outings involving clients, employees, or business partners. Historically, businesses could deduct part of these costs, but since 2018, the IRS has largely eliminated deductions for entertainment unless the expense directly benefits employees or qualifies under narrow business exceptions.

How to categorize entertainment expenses

Record under Operating Expenses on your income statement.
Use a dedicated “Entertainment” or “Meals and Entertainment” account in your chart of accounts.
Keep entertainment separate from Meals and Travel expenses, as the tax treatment differs.
Only classify as “entertainment” if the primary purpose is business-related relationship-building or employee engagement.
Maintain detailed records describing the event, attendees, and business purpose.

Examples of entertainment expenses

Client entertainment (e.g., concerts, sporting events, golf outings).
Holiday parties, company picnics, or employee social events.
Hospitality suites or receptions at conferences.
Event tickets purchased for clients or partners.
Recreational activities provided during business meetings.

Tax implications for entertainment expenses

Client entertainment is generally not tax-deductible (IRS Section 274, post-2018 rules).
Employee entertainment, such as company parties or team-building events, remains 100% deductible.
Meals during entertainment (e.g., dinner before a show) may be 50% deductible if business discussions occur and receipts clearly separate food costs.
Expenses must be ordinary, necessary, and directly related to your business to qualify for any deduction.
Always keep detailed receipts showing date, amount, attendees, and business purpose.
Deduct qualifying costs on Schedule C (for sole proprietors) or the relevant expense section of your business tax return.