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In a business context, entertainment expenses are the costs employees incur to eat and occupy themselves and business associates while they are working to generate income for employers. This may include money spent on client cultivation, such as taking a prospect out to lunch or interacting with a target group over a round of golf. Often, this category is important for tax purposes, as many jurisdictions allow businesses to deduct these types of expenses from revenue before determining taxable income.
Many countries require businesses to pay income taxes as independent entities in the same way that individuals pay income taxes on wages earned. The jurisdiction's tax code defines the types of expenses that can reduce a company's taxable income. These business expenses are typically grouped into categories to simplify accounting. While the category of entertainment expenses can theoretically contain anything related to the topic, it must only contain those expenses that are authorized by the tax code if a business wants to use the category as a business expense deduction.
Tax codes differ by jurisdiction. The formal definition of entertainment expenses for tax purposes likewise differs. There is an international push to standardize business accounting rules across jurisdictions that has normalized the definitions of expenses and deductions to some extent. Differences persist, of course, but the treatment of entertainment expenses in one major jurisdiction, such as the US, is a reasonable example of how the expense category is treated generally.
Entertainment expenses are typically defined as any expenditure that provides entertainment, amusement or recreation to entertain a client, customer or employee as a necessary part of generating business income. These expenses can include meals. To treat these expenses as business deductions, they must be incurred in a business setting or for the express purpose of conducting business. The expenses cannot be included in another business expense category, such as travel, and cannot be lavish or extraordinary.
Government taxing agencies try to limit the use of the entertainment expenses category because it is subject to abuse. Companies sometimes try to classify any type of entertainment as a business expense and use the category to write off unnecessary or personal entertainment. In the US, for example, the IRS only allows a business to deduct 50 percent of the entertainment expenses that it claims. It also requires businesses to document expenses by keeping track of the amount of the expense, the date and place it was incurred and the business relationship of the person entertained.
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