Page 13 of 59 of Publication 463 17:36 - 21-JAN-2010 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. stated, you can deduct these expenses in addi- or for the spouse of a customer. However, you If you and your spouse both give gifts, both of tion to the amounts allowable for the skybox, can deduct these costs if you can show that you you are treated as one taxpayer. It does not subject to the requirements and limits that apply. had a clear business purpose, rather than a matter whether you have separate businesses, The amounts separately stated for food and personal or social purpose, for providing the are separately employed, or whether each of beverages must be reasonable. You cannot in- entertainment. you has an independent connection with the flate the charges for food and beverages to recipient. If a partnership gives gifts, the partner- avoid the limited deduction for skybox rentals. Example. You entertain a customer. The ship and the partners are treated as one tax- cost is an ordinary and necessary business ex- payer. pense and is allowed under the entertainment What Entertainment it is impractical to entertain the customer without Company. He and his wife, Jan, gave LocalBob Jones sells products to LocalExample.rules. The customer’s spouse joins you because Expenses Are Not taining the customer’s spouse. If your spouse for their business. They paid $80 for each pack-Company three cheese packages to thank themthe spouse. You can deduct the cost of enter- Deductible? is present, the cost of the entertainment for your executives took the packages home for theirage, or $240 total. Three of Local Company’sjoins the party because the customer’s spouse This section explains different types of entertain- families’ use. Bob and Jan have no independentspouse is also deductible. ment expenses that you generally may not be business relationship with any of the executives’ able to deduct. Gift or entertainment. Any item that might be other family members. They can deduct a total considered either a gift or entertainment gener- of $75 ($25 limit × 3) for the cheese packages. Club dues and membership fees. You can- ally will be considered entertainment. However, not deduct dues (including initiation fees) for if you give a customer packaged food or bever- Incidental costs. Incidental costs, such as membership in any club organized for: ages that you intend the customer to use at a engraving on jewelry, or packaging, insuring, • Business, later date, treat it as a gift. and mailing, are generally not included in deter- • Pleasure, performance or sporting event and you do not go limit.mining the cost of a gift for purposes of the $25If you give a customer tickets to a theater • Recreation, or with the customer to the performance or event, A cost is incidental only if it does not add • Other social purpose. either a gift or entertainment, whichever is to cost of gift wrapping is an incidental cost. How-substantial value to the gift. For example, theyou have a choice. You can treat the tickets as This rule applies to any membership organiza- your advantage. ever, the purchase of an ornamental basket for tion if one of its principal purposes is either: You can change your treatment of the tickets packaging fruit is not an incidental cost if the • To conduct entertainment activities for at a later date by filing an amended return. value of the basket is substantial compared to members or their guests, or Generally, an amended return must be filed the value of the fruit. within 3 years from the date the original return • To provide members or their guests with was filed or within 2 years from the time the tax Exceptions. The following items are not con-access to entertainment facilities, dis-was paid, whichever is later.sidered gifts for purposes of the $25 limit.cussed later.If you go with the customer to the event, you must treat the cost of the tickets as an entertain- 1. An item that costs $4 or less and: The purposes and activities of a club, not its ment expense. You cannot choose, in this case, name, will determine whether or not you can deduct the dues. You cannot deduct dues paid to treat the tickets as a gift. a. imprinted on the gift, andHas your name clearly and permanently to: b. Is one of a number of identical items • Country clubs, you widely distribute. Examples include • Golf and athletic clubs, pens, desk sets, and plastic bags and • Airline clubs, cases. 3. • Hotel clubs, and 2. Signs, display racks, or other promotional material to be used on the business prem- • Clubs operated to provide meals under cir- ises of the recipient. cumstances generally considered to be conducive to business discussions. Gifts Gift or entertainment. Any item that might be Entertainment facilities. Generally, you can- If you give gifts in the course of your trade or considered either a gift or entertainment gener- not deduct any expense for the use of an enter- business, you can deduct all or part of the cost. ally will be considered entertainment. However, tainment facility. This includes expenses for This chapter explains the limits and rules for if you give a customer packaged food or bever- depreciation and operating costs such as rent, deducting the costs of gifts. ages that you intend the customer to use at a utilities, maintenance, and protection. later date, treat it as a gift. An entertainment facility is any property you If you give a customer tickets to a theaterYou can deduct no more than $25$25 limit. own, rent, or use for entertainment. Examples include a yacht, hunting lodge, fishing camp, for business gifts you give directly or indirectly to performance or sporting event and you do not go swimming pool, tennis court, bowling alley, car, each person during your tax year. A gift to a with the customer to the performance or event, airplane, apartment, hotel suite, or home in a company that is intended for the eventual per- you have a choice. You can treat the cost of the vacation resort. sonal use or benefit of a particular person or a ment expense, whichever is to your advantage.tickets as either a gift expense or an entertain-limited class of people will be considered an Out-of-pocket expenses. You can deduct indirect gift to that particular person or to the You can change your treatment of the tickets out-of-pocket expenses, such as for food and individuals within that class of people who re- at a later date by filing an amended return. beverages, catering, gas, and fishing bait, that ceive the gift. Generally, an amended return must be filed you provided during entertainment at a facility. within 3 years from the date the original returnIf you give a gift to a member of a customer’s These are not expenses for the use of an enter- family, the gift is generally considered to be an was filed or within 2 years from the time the tax tainment facility. However, these expenses are was paid, whichever is later.indirect gift to the customer. This rule does not tests and to the 50% limit, all discussed earlier. apply if you have a bona fide, independent busi- If you go with the customer to the event, youassociated anddirectly-related subject to the ness connection with that family member and must treat the cost of the tickets as an entertain- Expenses for spouses. You generally cannot the gift is not intended for the customer’s even- ment expense. You cannot choose, in this case, deduct the cost of entertainment for your spouse tual use. to treat the cost of the tickets as a gift expense. Chapter 3 Gifts Page 13
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