In the legal profession, lawyers sometimes try a little too hard at the networking thing – and lawyer or not, you know exactly what I’m talking about. It’s the whole standing around in suits thing, trying to pretend you’re comfortable, all the while looking for someone better to talk to. Why bother?
When it comes to promoting your business, why be penned in to someone else’s vision of what networking is supposed to be? Why honor milestones doing something that you don’t particularly like to begin with? Why try wooing clients by attending or hosting an event that doesn’t even represent you?
Nobody – not even Uncle Sam – says that promoting your business has to be boring. Stepping outside of the box doesn’t mean that you can’t take the deductibility with you. Consider planning your next promotional or networking event to look more like you, not every other business event, and take the tax benefits with you!
So how does deducting promotional and networking expenses work?
To meet the test for most business expenses, the expense must be both “ordinary and necessary.” An ordinary expense is an expense that “is common and accepted” in your field of business. A necessary expense is one that “is helpful and appropriate for your business.”
In addition, to pass muster, an expense should be reasonable. Clearly, you cannot deduct expenses that are lavish or extravagant under the circumstances. So, no matter how many times my daughters beg otherwise, I can’t fly in Hannah Montana to perform at my law firm party or have it catered by Wolfgang Puck. That doesn’t mean that it can’t be nice – law firms often have lovely cocktail parties like we had one year at the Union League – or interesting, such as the evening that we turned the firm into an art gallery for local artists.
But don’t book the caterer yet. There are some additional restrictions.
The IRS has litany of tests on entertainment and promotional expenses (you can find them in Publication 463, Travel, Entertainment, Gift and Car Expenses). But – and I’m oversimplifying a bit – for the most part, it’s really about expectations. You should expect some measure of business income or benefit as a result of your event. It can’t just be all about fun (though fun is clearly allowed under the Regs, I swear).
In addition, you should be able to prove that you had a clear business purpose for the expense. What counts as a clear business purpose? A host of things, including soliciting new business and encouraging the continuation of an existing business relationship. So, think your event through before you act and have your answer ready: exactly what business purpose are you trying to accomplish?
If you can prove a clear business purpose and the expectation of a business benefit (as well as meeting the ordinary, necessary and reasonableness tests), you should be able to count much of the expenses associated with the event as entertainment expenses. Note, however, that the amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses: knowing that limit applies to entertainment expenses is important. You’ll want to check with your tax professional if you’re not sure whether the expense qualifies as entertainment or some other category.
With that last bit in mind, here’s a tip: separately state your expenses related to the event. You may be able to deduct 100% of associated expenses – promotional materials for your company, for example, that you distributed (like business cards, printed materials). Don’t get cheated by assuming that the 50% limit will apply to the whole of the event!
The bottom line is that promoting your business and networking is an essential part of running a business. As a result, promotional events for your business – if you play your cards right – can be valuable tools and deductible, to boot. Just remember to think your event through, keep your business purpose in mind and have fun with it – and um, send me an invitation?
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