Wouldn’t it be nice if you could have a good time, and get a personal income tax deduction for your efforts? If you’re a sole proprietor, the sole member of a single-member LLC or the sole member of an S corporation, we may have news for you!

If you entertain a client, customer or an employee for a business-related reason, you would be able to utilize 50% of the expense as a deduction on your individual income tax return. You’ll need to keep all the invoices, or at least a detailed record of when, where, why, who with and how much you spent for entertaining clients. Just fill out the box on Line 24b of Form 1040, Schedule C.

Easy as that? It would be uncharacteristic of the tax code if it were. Let’s talk about the details…

Relevant entertaining expenses are eligible for the 50% deduction if either:

1) The expenditure was directly related to your business, e.g., a business meeting at a restaurant that you took an active role in; or

2) The expenditure was associated with your business, and the entertainment occurred just before or after a substantial business discussion.

There is some gray area in what the IRS considers “reasonable” entertaining expenses. If you treat a client to a meal to close a business deal, and then buy drinks for your employees afterwards to celebrate, these expenses (including sales tax and tips) would probably be eligible for the 50% deduction as they are directly associated with your business. If, on the other hand, you were to pay $10,000 for a meal with a client to discuss a potential project, and treat your client to a night out at a club the following day, you’d have a harder time claiming these on your 1040. The IRS would consider a $10,000 meal lavish and extravagant, and hence not reasonable. The nightclub expenses will also not be eligible, as the IRS takes the view that, unless proven otherwise, you can’t conduct business in a noisy place like a nightclub. However, if he takes a client out to a nightclub after concluding a business deal, then the expense would be eligible.

In additional to the typical meal or drink, you could add any form of recreational or amusement activity within the definition of “entertainment.” Even your fishing trip can be considered to be “entertainment,” but remember that you can only claim the 50% deduction if you can prove that the direct or associated purpose of your fishing session was to conduct business! You won’t be able to write off your yacht, either: the IRS won’t allow any expenses relating to entertainment facilities that you either rent or own – depreciation, utilities, maintenance and rent. However, oddly enough, ‘out-of-pocket’ expenses such as the fishing bait that you buy for the client fishing trip can qualify for the 50% deduction.

After you’ve made your list of entertaining expenses to declare on your tax return, it comes time to provide the paper trail to back up your claim. In the tax world, if you don’t have the relevant records, the expense won’t exist as far as the IRS is concerned. Having said that, remembering to keep your invoices is not always the easiest — especially if you’ve lubricated your client discussions with a few pints of Guinness.

Thanks to Mr. George M. Cohan, things aren’t so strict when it comes to entertainment expenses. In his tussle with the IRS (Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930)), Mr Cohan wasn’t able to substantiate all his entertainment expenses to the IRS, although he did provide an approximation to his claim. The IRS, being the IRS, wasn’t interested in anything Mr Cohan couldn’t substantiate with invoices.

Surprisingly, the ruling from this landmark case was that it was unreasonable of the IRS not to allow at least some of Mr Cohan’s approximations, even if he wasn’t able to furnish the relevant invoices.

What this anecdote means is that, though you still can’t claim whatever entertainment expense deduction you feel like, you do have a bit of leeway if you’d forgotten to pick up the invoice for that big client entertainment meal last month, so long as you’ve made a decent record of it. Just be sure to make a reasonable approximation… and don’t forget to raise a toast to Mr Cohan for his efforts.