Tax Reform Plays Havoc with Holiday Deductions

Article excerpt

With the holiday season approaching, tax practitioners have been trying to sort out how the Tax Reform Act of 1986 affects business gifts, office Christmas parties and other festivities. It is no simple matter.

Some holiday celebrations, for instance, are now only 80 percent deductible, while others remain fully deductible. The difference depends on the guest list. Toasting the holidays over lunch with a cherished client may be partly deductible or non-deductible - depending on the nature of the conversation.

Generally, business meal and entertainment expenses are only 80 percent deductible. But the law contains an exception for certain holiday parties. If the office party is for employees, the cost is fully deductible since the new law provides an exception to the 80 percent rule for ``certain traditional recreational events for the benefit of employees.'' If the party is for clients, however, the expense is only 80 percent deductible.

The function does not have to be held at the office or in a private room at a restaurant or hotel. Entertaining clients at an executive's home can be a deductible affair. But Gerald G. Portney, a former assistant commissioner of the Internal Revenue Service, cautions that auditors tend to scrutinize home entertainment deductions more closely to make sure executives are not trying to write off a party that was really a social gathering of friends.

``The best case is to just invite your business clients,'' said Portney, now a principal at the accounting firm of Peat Marwick Main & Co. ``If that's not possible, make sure the clients represent the preponderance of the guest list.''

Many salesmen and executives take valued clients out for a holiday lunch or cocktails at an expensive restaurant. This year, tax experts caution, the conversation at these get-togethers will need to be more mercenary than in the past in order to qualify for even an 80 percent deduction.

Under the old tax law, thanking the client for his or her business would have been more than sufficient to qualify for a deduction. Not a word of business had to be uttered so long as the setting was conducive to a business discussion - that is, no distracting floor shows. …