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Holiday Parties: Keeping Expenses Low and Deductibility High
The Legal Intelligencer
November 20, 2009
Image: Photodisc Blue
The economy isn't giving us a lot to cheer about this holiday season ... and it could get worse. This year, more companies are saying no to an annual tradition: the office holiday party.
According to a survey from Challenger Gray & Christmas Inc., only 62 percent of companies were planning holiday parties this year, down from 77 percent a year ago and 90 percent in 2007. The decline is fairly consistent with my own, admittedly less scientific research on Twitter and by querying members of the Pennsylvania Bar Association solo and small firm section, with at least one respondent lamenting, "no (but wish they did)."
For those companies that are hosting a party this year, the economy is definitely factoring into what to spend. And, no surprise, law firms are joining the ranks of those scaling down.
While affairs like Houston plaintiffs lawyer Mark Lanier's extravagant holiday parties boasting 7,000-plus guests and the likes of Reba McEntire, Diana Ross and The Dixie Chicks as performers once topped the headlines of the ABA Journal, the large percentage of events this year are more modest.
Two out of three companies have reported that they will spend roughly the same as last year, with nearly a third of those remaining reporting that they will spend less, according to the survey. Practically no companies are willing to admit spending more in 2009 than in 2008.
SKIPPING A PARTY: SMART FINANCES OR DEADLY OFFICE POLITICS?
Some are arguing the latter. Holiday office parties have long been a way of saying thank you to employees for their service. In a year filled with layoffs and cutbacks, stress at many offices, law firms included, has run high. Notwithstanding the specter of bad buffets and karaoke machines, a holiday party done right has the potential to translate into increased productivity and loyalty. Acknowledging service in a tough year can make employees feel valued and keep them motivated.
Giving employees expensive gifts or cash can result in negative income tax consequences to the employees since those items are reportable by the employees as income. But the IRS allows you to throw a firm or company holiday party with no tax consequences to the employees. You can have a meal catered at the office or take your employees out for dinner as a non-taxable thank-you. And unlike other business lunches and dinners, you don't have to "talk business" at any time in order to make it deductible to the company.
But mind the term "reasonable": Even if your company is doing well this season, be sure to keep those parties reasonable. A company may not deduct expenses for entertainment that is "lavish or extravagant." According to the IRS, an expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances.
What's reasonable? That depends. Collegeville, Pa., law firm Miller Turetsky Rule & McLennan decided, after a good year, to spring for a caterer this year so that the staff "would not have to stress about making things for the party during the busy holiday season." Partner Keith McLennan explained that they addressed the cost issue by hosting the event at a partner's house, "making it cheaper in the long run anyway."
That sort of creative thinking will likely win points with staff -- and pass muster with the IRS.
The best advice is to use common sense. If your company's HR policy otherwise allows it, a nice bottle of wine at a holiday lunch may not raise an auditor's eyebrows. But a number of $200 bottles of wine or expensive entertainment hired for the evening might. Your spending for the event should be consistent with the type and level of company or firm that you manage.
Additionally, make sure that the purpose of the holiday party is to acknowledge the service of all employees of the company or firm. Cherry-picking employees for a holiday party is not only inviting a lawsuit, but a potential audit. An invite to the office holiday party should be extended to all employees to avoid the appearance of simply providing entertainment for top-level management (problematic for sure and not 100 percent deductible).
Finally, check and re-check that guest list. In general, you can deduct only 50 percent of your business-related meal and entertainment expenses -- holiday office parties for employees fall outside of that limit. But if you're entertaining clients or customers socially (and not to talk business), the 50 percent limit will apply whether at your place of business, a restaurant or other location. Similarly, if you entertain business and non-business individuals at the same holiday party, you must divide your entertainment expenses between the two. Consider those deductibility limits when adding to the guest list.
A holiday party for your firm or company can be a wonderful way to say thanks to those employees who have contributed to your successes throughout the year. Done right, it can be tax-free to the employees and tax-deductible to the company -- and that's something worth cheering about this season. •
Kelly Phillips Erb is a founding shareholder of The Erb Law Firm. She is a member of the bars of New Jersey and Pennsylvania and the Tax Supper Club, and she presents regularly on a wide range of topics before local and national organizations. Phillips Erb authors the blog Taxgirl.
