What I can claim for entertainment if I can?

Question

I own a 3 family home and rent 2 apt. Can I claim entertainment expenses? What can I claim?

Answer 1

Unless you have a business
Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the following two tests:

the directly–related test, or
the associated test.

In order to meet the directly-related test under the general rule you must show that:

You had more than a general expectation of getting income or some other specific business benefit at some future time;
You engaged in business with the person being entertained during the entertainment period;
The main purpose of the entertainment was the active conduct of business; and
The expenditure was allocable to the taxpayer and a person with whom the taxpayer conducted business during the entertainment or with whom the taxpayer would have conducted business (if it were not for circumstances beyond the taxpayer's control).

You may also meet the directly-related test by showing that the expenditure was for entertainment occurring in a clear business setting directly in furtherance of the taxpayer's trade or business; that the expenditure was made directly or indirectly to someone (other than an employee) as compensation for services; or that the expenditure was paid as a prize or award which is required to be included in the recipient's gross income. An expense will not be directly related under circumstances in which there is little or no chance of engaging in the active conduct of business.

For entertainment to meet the associated test, you must show that the entertainment was associated with the active conduct of your trade or business and directly preceded or followed a substantial and bona fide business discussion.

You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.

Generally, only 50% of food and beverage ("meal") and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

Entertainment includes any activity generally considered to provide/constitute entertainment, amusement, or recreation. This includes entertaining guests at night clubs, social events, theaters, sporting events, athletic clubs, on yachts, or on hunting and fishing vacations, and similar trips. The cost of a meal you provide a customer or client is deductible as entertainment (subject to the 50% limitation) only if you or your employee is present when the food or beverages are provided and the expense is not lavish or extravagant under the circumstances.

None of the dues you pay for membership in any club organized for business, pleasure, recreation, or other social purpose is deductible, if a principal purpose of the club is to conduct entertainment activities or provide access to entertainment facilities for members or their guests. Additionally, no deduction is allowed for operating expenses incurred with respect to a facility used in connection with entertainment (e.g., yacht, hunting lodge, fishing camp, swimming pool).

If you are an employee whose deductible business entertainment expenses are fully reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If you are not reimbursed under an accountable plan, your expenses exceed the reimbursement you received under an accountable plan, or you are not reimbursed, use Form 2106 (PDF), or if you meet the conditions, Form 2106-EZ (PDF) to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Form 1040, Schedule A (PDF), and are generally subject to the 2% of adjusted gross income limit. Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.

If you are self–employed, use Form 1040, Schedule C (PDF), or Form 1040, Schedule C-EZ (PDF), or if you are a farmer, use Form 1040, Schedule F (PDF) to deduct these expenses.

Answer 2

Your real estate rental income and expenses are reported on Schedule E, which has no provision for entertainment expense.

If you move all the items to schedule C, you can deduct legitimate entertainment expense in accordance with the rules. However, you are then subject to the Self-Employment Tax which generally will offset any entertainment deductions.

So, unless your expenses substantially offset your income, it doesn't pay to move Real Estate rental income to schedule C.

Answer 3

Based upon what you have listed here, no, you cannot claim entertainment expenses. You can claim the costs related to the 2 rental units such as repairs & maintenance, utilities, taxes & interest, management commissions, etc.