how to categorize team building expenses
how to categorize team building expenses

Maximizing Tax Deductions: How to categorize team building expenses for small businesses

Small business owners understand the value of nurturing strong relationships within their teams through team-building activities. What many small business owners might not be aware of is the potential tax benefits associated with properly categorizing these team-building expenses. So, how can small business owners categorize team-building expenses to maximize tax benefits while staying within the legal bounds? 

The IRS and entertainment expenses

Team-building falls under the general category of entertainment expenses. The IRS has clear guidelines to ensure that these deductions are claimed appropriately. If your company is ever selected for an audit, the business meals & entertainment expense category is one place the IRS will certainly look. Although the IRS rules surrounding entertainment expenses can be complex, it’s crucial to understand the basics.

To qualify as a tax deduction, the primary purpose of the entertainment event must be conducting business with a reasonable expectation of obtaining specific business benefits. Team building checks those boxes—effective team-building activities can enhance employee collaboration, boost morale, and improve overall productivity, all of which contribute to business success.

However, it’s important to differentiate team-building events from leisure activities. The IRS generally does not consider leisure activities with no clear business purpose as deductible; they must be aligned with organizational goals. Sorry, they may not take the bait for that solo CEO fishing trip! 

You might also be interested in: Are gifts to clients and employees tax-deductible? 

Categories of team-building costs

The following expense categories can be included as part of your team-building costs and are 100% deductible: 

  • Food and beverages: Whether it’s providing meals during team-building workshops or hosting client dinners, you can include the costs of food and beverages. 
  • Venue booking: If you’re organizing a team-building event at an external location, the venue booking charges can be part of the employee entertainment expenses.
  • Accommodation: When team members or clients need to stay overnight for an event, the accommodation costs can be factored in.
  • Other entertainment costs: This category covers miscellaneous expenses like hiring performers, arranging live music, or providing gifts for employees and attendees.

Strategies for maximizing deductions

Make sure that you can prove that your team-building expenses are eligible deductions by maintaining comprehensive documentation. To ensure you’re getting the most out of your deductions, consider the following:

  • Expense tracking: Be meticulous about tracking expenses. Maintain a detailed record of event details, costs, and attendees. This data will be critical when preparing your tax return and in the event of an audit.
  • Categorization: Properly categorize business entertainment expenses based on IRS guidelines. Differentiate between activities that fall under 50% tax exemptions and those eligible for 100% write-offs.
  • Documentation: Store records of the event, including its purpose, date, location, and attendees, and a comprehensive file of all invoices, receipts, and event-related documents. This serves as evidence of the event’s business purpose and helps justify deductions.
  • Link to business outcomes: Whenever possible, connect team-building events to tangible business outcomes. Highlight improvements in teamwork, productivity, or client relationships resulting from these activities. While the IRS doesn’t require direct proof of business benefits, having a clear documentation trail can bolster your case during an audit. Demonstrating a strong link between team-building activities and positive business outcomes can make a compelling argument for the deductibility of these expenses.

If you’re unsure about the deductibility of certain expenses, consult with a tax advisor like Financial Solution Advisors. We can provide tailored advice based on your business’s unique circumstances and ensure that team building isn’t just an investment in your company’s culture—it can also lead to valuable tax deductions. 

Want to reduce your tax burden even further? 

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