What expense category is Client Entertainment?

Building client relationships often involves activities outside the office, historically including entertaining clients at sporting events, concerts, or golf outings. However, the rules around deducting these expenses changed significantly with the Tax Cuts and Jobs Act (TCJA) of 2017. Accountants and SMB owners must understand the current landscape for classifying and deducting client entertainment costs.

This guide explains the proper accounting treatment and the significant tax limitations now placed on client entertainment expenses.

Client Entertainment Expense Category

The most critical point regarding client entertainment is its tax treatment: under current law, expenses for activities generally considered entertainment, amusement, or recreation are NO LONGER DEDUCTIBLE for tax purposes. This rule has been effective since 2018.

• Accounting Treatment: Even though these costs are not tax-deductible, businesses still incur them and need to track them for accurate financial reporting and budgeting.
• Category: You should use a specific expense category in your chart of accounts, such as Client Entertainment Expense or Entertainment Expense. This clearly identifies the spending and segregates it from potentially deductible costs.
• Distinction from Business Meals: It is crucial not to confuse non-deductible entertainment with potentially deductible Business Meals. While meals provided during entertainment might be partially deductible under specific conditions (see below), the cost of the entertainment activity itself remains non-deductible.

Some Important Considerations While Classifying Client Entertainment Expenses

Given the tax law changes, careful handling of entertainment costs is essential:

1. General Non-Deductibility: The cost of the entertainment activity itself—tickets to sporting events or theater, green fees for golf, cover charges, costs of recreational trips like fishing—is generally non-deductible.
2. Separating Meal Costs: This is a key exception. You may be able to deduct 50% of the cost of food and beverages provided during client entertainment IF the cost of the food and beverages is stated separately from the cost of the entertainment on the bill or invoice, or if purchased separately.
   
   • Example: If you take a client to a baseball game and buy tickets that include food in a suite, the entire cost is non-deductible entertainment unless the invoice specifically breaks out the food and beverage cost. If you buy game tickets (non-deductible) and then separately buy hot dogs and drinks at the concession stand (potentially 50% deductible), you must have records for both purchases.
   • Meal Requirements: Even if separated, the meal cost must still meet standard business meal requirements (ordinary & necessary, not lavish, taxpayer/employee present, business purpose met).
3. Club Dues: Dues paid to any club organized for business, pleasure, recreation, or social purposes (e.g., country clubs, golf clubs, athletic clubs, airline clubs) are not deductible.
4. Entertainment Facilities: Costs associated with owning, renting, or using entertainment facilities (like yachts, hunting lodges, fishing camps, swimming pools, vacation homes) for entertaining clients are generally not deductible.
5. Recordkeeping: While the entertainment cost isn't deductible, track it accurately in your books. If you intend to deduct separately stated meal costs, you must keep detailed records proving the meal cost was separate and met all business meal substantiation requirements (amount, date, place, attendees, business purpose).

Examples of Client Entertainment Expenses

These activities are generally considered entertainment, and their costs are not deductible for tax purposes:

• Taking clients to sporting events (football, baseball, basketball games, etc.).
• Tickets for theater, concerts, performances, or movies.
• Golf outings (green fees, cart rentals) with clients.
• Taking clients to nightclubs or bars (cover charges, activity fees - drinks/food might be deductible if separate).
• Hunting, fishing, sailing, or vacation trips with clients.
• Renting facilities like hospitality suites at events for entertainment purposes (unless food/beverage cost is separate).

Tax Implications of Client Entertainment Expenses

• Non-Deductible: The primary tax implication is that client entertainment expenses related to amusement or recreation are generally NOT tax-deductible.
• Separately Stated Meals Exception: The only potential deduction related to entertainment activities is for qualifying business meals where the food and beverage cost is purchased separately or stated separately on the invoice. This meal portion is subject to the 50% limitation.
• Statutory Exceptions: There are very narrow exceptions where entertainment costs might be deductible (e.g., company holiday parties mainly for non-highly compensated employees, entertainment treated as compensation, entertainment sold to customers), but these generally do not apply to typical client entertainment.
• Reporting: Non-deductible entertainment expenses do not appear as deductions on tax forms like Schedule C. They are tracked internally for bookkeeping. If you have qualifying, separately stated meals associated with entertainment, the 50% deductible portion is reported on Schedule C, Line 24b ("Meals").

How Fyle Can Automate Expense Tracking

Managing entertainment spending and correctly handling associated meal costs requires clear tracking and documentation. Here’s how Fyle can assist:

• Capture Detailed Receipts: Easily capture receipts and itemized invoices for entertainment and related food/beverage costs using Fyle's mobile app, email forwarding, or SMS. This is crucial for potentially separating deductible meal components.
• Accurate Categorization: Use Fyle to distinctly categorize expenses as "Client Entertainment" (non-deductible) versus "Business Meals" (potentially 50% deductible). Fyle's AI data extraction may help identify separate meal charges on itemized receipts.
• Policy Enforcement: Configure Fyle policies to automatically flag entertainment expenses, remind employees of the non-deductibility rule, and require specific documentation (like itemized receipts showing separate meal costs) if the meal portion is being claimed.
• Track Non-Deductible Spending: Accurately track non-deductible entertainment costs for internal budgeting and financial reporting purposes.
• Seamless Integration: Sync categorized data to your accounting system (QuickBooks, Xero, NetSuite, Sage Intacct). This ensures non-deductible entertainment is coded correctly in your books and that potentially deductible meals are flagged appropriately for the 50% limit calculation during tax preparation.

Since 2018, the deduction for client entertainment expenses has been largely eliminated under U.S. tax law. Businesses can generally no longer deduct costs for activities considered entertainment, amusement, or recreation. 

The only potential exception relates to business meals provided during such activities, but only if their cost is separately stated or purchased, and even then, only 50% of the meal cost is deductible. 

Careful recordkeeping and clear categorization, supported by tools like Fyle, are essential for tracking these non-deductible costs and correctly handling any associated, potentially deductible meal expenses.