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All employees, including owners, managers, and rank-and-file personnel, were eligible to take
these cruises, but they had to sign up in advance on a first-come, first-served basis.
The court allowed the full $41,000 deduction for the 41 cruises because the cruises
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• were primarily for the employees,
• did not discriminate in favor of the owners and highly compensated employees,
• were documented as to who cruised and when, and
• passed the “ordinary and necessary” business purpose test.
Some time ago, we wrote about the insurance agent who took his staff to Atlantic City, N.J., for
a boondoggle. Obviously, this is not the traditional holiday party, but it qualifies for the 100
percent deduction.
Who Are These Employees?
In this party section of the tax law, you (as an owner) belong to the “tainted group.”
Technically, the law requires that the entertainment expenses be primarily for the benefit of
employees other than a tainted group, which consists of any of the following:
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• A highly compensated employee (an employee who is paid more than $130,000 in
2021)
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• Anyone (this likely includes you) who owns at least a 10 percent interest in your
business, i.e., a “10 percent owner”
• Any member of the family of a 10 percent owner, i.e., brothers and sisters (including
half-brothers and half-sisters); spouses; ancestors (parents, grandparents, etc.); and
lineal descendants (children, grandchildren, etc., including adoptees)
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Remember, as the business owner, you belong to the tainted group. That’s not a big deal. You
just need to make sure that partying with the employees is primarily for the benefit of the
employees.
“Primary” Means “More Than 50 Percent”
In tax law, the words “primary” and “primarily” mean “more than 50 percent.”
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For employee
recreation, that means the untainted group of employees has to have more than 50 percent use of
the entertainment facility—or in the case of a party, a majority of the attendees must come from
the untainted employee group.
Documentation tip. You can measure “primary” by days of use, time of use, number of
employees, or any other reasonable method. Regardless of how you measure use, the key to your
deductions is the records that prove the uses.
Easy-to-Meet Business Purpose Requirement