If you host customers, advisers, suppliers, or other business associates, you may be able to deduct 50% of your entertainment costs. However, because taxpayers have abused the entertainment deduction, there are many specific rules about what expenses may be deducted and how to prove the meal or entertainment had a business purpose.
To claim a deduction, you must be hosting someone who can benefit your business in some way — for example, a supplier of inventory or a software consultant. You cannot deduct the cost of entertaining family or friends unless they also do business with you. In addition, you must actually discuss business before, during, or after the event. If you plan to claim that you discussed eBay business during the event, know that you won’t be able to deduct much more than the cost of a meal. The IRS believes that most types of entertainment — going to the theater, a ball game, or a cocktail lounge, for example — are not conducive to serious business discussions, and they are not deductible.
In addition, the IRS won’t accept certain expenses as entertainment costs, including the cost of renting, buying, or building an entertainment facility (such as a fishing lodge or tennis court); club dues; membership fees; or the cost of nonbusiness guests. As may be apparent, deducting meals and entertainment expenses is another area where the rules can be complicated. For more information, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.