Legal Definitions - entertainment expense

An entertainment expense refers to costs incurred by a business for activities intended to entertain clients, prospective clients, employees, or other business associates. These expenses are typically related to promoting goodwill, fostering business relationships, or rewarding staff. While historically a significant category for tax deductions, the rules governing their deductibility have changed considerably over time.

Here are some examples to illustrate this concept:

• Example 1: Client Appreciation Dinner

  A marketing firm hosts a dinner at a high-end restaurant for a long-standing client and their team to celebrate the successful completion of a major project and discuss future collaborations. The firm covers the cost of the meals and beverages for everyone present.

  Explanation: The expense for the dinner and drinks is an entertainment expense because it was incurred by the marketing firm to entertain a client, strengthen their business relationship, and potentially secure future work. It's a cost directly related to fostering goodwill with a business associate.

• Example 2: Employee Team-Building Event

  A software development company organizes an off-site team-building day for its employees, which includes activities like an escape room challenge followed by a catered lunch and an evening social mixer with appetizers and drinks.

  Explanation: The costs associated with the escape room, catered lunch, and social mixer are entertainment expenses. These expenditures are made by the company to entertain its employees, promote team cohesion, and boost morale, which are all activities intended to benefit the business through its workforce.

• Example 3: Business Development Outing

  A real estate developer purchases tickets to a professional golf tournament for themselves and a potential investor. During the event, they discuss investment opportunities and the developer's upcoming projects in a relaxed, informal setting.

  Explanation: The cost of the golf tournament tickets is an entertainment expense. The developer incurred this cost to entertain a prospective investor, creating an environment conducive to discussing business and building a relationship that could lead to a future investment.