Transcription
Today, we're going to find out how throwing a holiday party could actually reduce your tax bill. You've probably seen all the people on social media saying you can deduct your birthday party or even your wedding if you invite the right people. Some of that sounds way too good to be true because it is. And some of it has just enough truth that if you structure it properly, it can work.
The problem is most of these people shouting these hacks online have no idea what the actual rules are, but you should. And today I'm going to break them down so you know exactly how to throw an event that's 100% deductible and IRS proof. And I'm Jasmine Duchcci. I'm a practicing tax attorney, CPA, and enrolled agent. I got my first tax license in high school. And today's video, we're going to go through the legal requirements to deduct your next party, what parties can be deductible and what cannot based on real tax law and court cases, and practical tips you can use right now to legally take advantage of this tax benefit.
First, legally, what is required to deduct your next party? Okay, in 2017, tax reform killed almost all entertainment deductions. Golfing with a client, not deductible. Tickets to a concert with a vendor, not deductible. Party on a yacht with celebrity clients, definitely not deductible. But there's one big exception, IRC 274E, and it allows a 100% meals and entertainment deduction if your event or activity is for recreational, social, or similar purpose. And it's primarily for the benefit of employees, which from treasure regulations is based on the true purpose and also attendees. That's why the employee holiday party is the textbook example. It's social, it's recreational, and it's done for your team. It qualifies as one of the last remaining 100% deductible entertainment expenses.
But you know from my content that tax law is not always what it seems at first glance. And that's why we have so many ignorant tax marketers. I mean strategists online who confidently think they know tax law. If you go past the very surface level, we learn that employees doesn't mean everyone on payroll as an employee. There are exclusions for the purposes of this deduction. We exclude owners. If you own 10% or more of the company, you don't count as an employee for this rule. Family members of those owners, even if they're on payroll, they are out. Okay? And highly compensated employees. In 2025, that means anyone making over $160,000. But if your company is stacked with high earners, you can elect to define highly compensated as just the top 20% of earners. The idea here is that the primary benefit should be for what we call rank and file employees. Okay? Your traditional employees of a business who work so hard and do so much of the work rather than a creative way of just paying your own family members or just for an elite group of high-income earners. And if your business is just you and your spouse, then you can't use this exception yet until you hire more employees who are not owners or related to owners. All right.
Second, what types of events or activities count? This is what the Treasury regulations and court cases tell us. Okay. What works is a holiday party at an event hall, a picnic or summer outing, a boat outing, or even use of an owner's pool at his home where actual use was primarily for rank and file employees. What doesn't work? Okay, a wedding reception. Yes, many people have thought of this idea in many different forms. It doesn't work. Even when taxpayers have reimbursed the attendance only for the business attendees, the primary purpose is too dominant. Okay, an event, even a client dinner that just happens to have your employees birthday at the same time, the purpose was not for the employee. Instead, it's incidental. So, not 100% deductible. Or a birthday party. If you call it a birthday party, remember the purpose matters. And if you send out invites saying come to my birthday party, you are giving the IRS a sharp sword against you and creating an uphill battle to climb. So your invite should say employee event or appreciation party. And if it happens to be near your birthday, that's okay as long as the focus and attendance reflects that it's primarily for the benefit of employees.
Finally, third, okay, how can you practically take advantage of this deduction? Invite the whole team. You want to document it. Save invitations, guest list, receipts, photos, anything that shows it was a genuine employee event. Okay? Keep a separate line item in your books for employee recreation. Remember, this is a 100% deduction. So, you want to record those costs in a separate line item so your tax preparer doesn't accidentally limit the deduction to 50% for meals and 0% for entertainment. And make sure the expense is still ordinary and necessary rather than very lavish for your business given your facts and circumstances. This keeps it 100% deductible under IRC 274E and ensures it is not taxable income to your employees.
So, here's the bottom line. Your holiday party can be 100% deductible as long as it's primarily for the benefit of employees, not owners or executives. And if you keep good records, you'll not only enjoy the party, you will enjoy the tax savings, too.