Business entertainment expenses are deductible if they meet certain requirements. Entertainment means any amusement or recreational activity and includes entertaining guests at such places as nightclubs, country clubs, theaters and sporting events. Deductible expenses must be ordinary and necessary for the carrying on of a trade or business or for the production or collection of income. In addition the expenses must be directly related to or associated with the operation of a trade or business or associated with the business regularly carried on by a taxpayer.

Directly related means there is more than a general expectation of deriving income, the taxpayer engaged in business with the person being entertained during the entertainment period and the principal character of the combined business and entertainment expenditure was the transaction of business. Expenses associated with the operation of a trade or business are those that do not meet the directly related criteria but directly precedes or follows a substantial and bona fide business discussion.

Deductions for meals and entertainment and related expenses including tax and tip are reduced by 50%. Travel and transportation expense are not affected by this reduction rule.