Are Team-Building Events Tax-Deductible?

According to Flair HR, 58% of employees rate morale as “okay,” “poor,” or “very poor” in companies that allocate less than $25 per month per person to team-building. Whereas this number drops to just 25% in businesses that invest over that.

It’s clear that team-building activities are crucial for morale, and employees who are happier are more productive! However, not all team-building activities are free, and if you want to spend over $25 per month per person on them, then it can quickly add up.

To alleviate your costs, you might be wondering: Are team-building events tax-deductible? Read on to see the answer and more.

Are Team-Building Events Tax-Deductible?

The short answer is yes, team-building events can be tax-deductible. However, this is only possible under certain conditions.

In general, the IRS allows deductions if the event is ordinary and necessary for business. In addition, it needs to meet specific entertainment or employee benefit rules.

The Key IRS Guidelines

Under Section 162 of the Internal Revenue Code, the IRS outlines deductions for business expenses (the “ordinary and necessary” part). The “ordinary” part means that it’s common and accepted in your line of business, and the “necessary” part means that it’s helpful and appropriate for your business operations.

So you can make team-building tax-deductible if the events:

• Improve morale, productivity, or communication
• Are planned primarily for the benefit of workers, not for personal entertainment or lavish client perks
• Aren’t excessive in cost

Types of Deductible Team-Building Events

The following are all fully deductible types of events:

• In-office team-building workshops (count as employee benefits)
• Employee picnics or retreats (100% deductible if open to all employees)
• Off-site problem-solving activities (must serve a business purpose)

Some client-inclusive events can be partially deductible. They’re only 50% deductible, and it should be only for the employee portion.

Lastly, after the 2017 Tax Cuts and Jobs Act, lavish or exclusive entertainment is no longer deductible at all.

So are company events tax-deductible? Only if they’re for your employees and they serve a business purpose.

How to Categorize Team-Building Expenses

Knowing how to categorize business expenses regarding team-building can make a huge difference. Here are the categories to use.

Employee Recreation (100% Deductible)

If your event is primarily for your workers and isn’t highly exclusive (for example, not just for executives), then generally speaking, it should be 100% deductible.

Examples include:

• Company holiday parties
• Team-building retreats
• Wellness or morale-boosting days

Meals and Refreshments (50% Deductible)

If meals are included in the event, then they may only be 50% deductible. The exception is if they fall under employee benefit exceptions, such as in-office snacks or meals for the convenience of the employer. If the meal is provided for the convenience of the employer, then it may be 100% deductible.

Travel and Lodging (Conditionally Deductible)

Travel and lodging are a bit trickier, but if business is the primary purpose of the trip, then the expenses should be deductible.

Make sure you keep an itinerary showing meetings, workshops, and sessions. If there are personal days, they must be clearly identified and excluded from the deduction.

Documentation You Need to Keep

We just mentioned that you should keep an itinerary to cover yourself. But what else can be beneficial?

To defend your deductions in case of an IRS audit, you should have the following:

• Receipts and invoices for all expenses from venues, catering, lodging, transportation, facilitators, etc.
• List of attendees and their roles (e.g., employees, clients, or vendors)
• Purpose of the event (ideally with an agenda or itinerary)
• Photos or emails to show that it was work-related (optional but helpful)

Step-by-Step Guide to Deducting a Team-Building Event

You now have all the pieces of information to confidently determine what’s deductible (and what’s not). But how can you put it into practice?

Here are the steps you should follow.

Step 1: Determine the Event’s Primary Purpose

This is perhaps the most important step; if your event doesn’t pass these questions, then it’s risky to proceed:

• Is this for professional development?
• Does it foster collaboration or communication?
• Would it be viewed as extravagant or personal entertainment?

Answering “yes” to all of the above means you can move on to step 2.

Step 2: Make It Inclusive

If you restrict the event to specific people at work, then this can make it ineligible for deductions. Avoid restricting events to:

• Executives
• Sales teams
• High performers only

The broader and more inclusive the invitation list, the stronger your case for a 100% deduction.

Step 3: Separate Business vs. Entertainment

You’ll have to be prepared to distinguish between structured learning time vs. unstructured fun. In addition, you’ll have to differentiate between work-related expenses (venues, materials) vs. personal entertainment (drinks, shows).

Step 4: Track and Categorize Expenses

Break down your expenses into clear categories. For example:

• Meals
• Lodging
• Venue rental
• Transportation
• Team-building facilitators

Bookkeeping software like QuickBooks or Wave can help you tag each correctly.

Step 5: File the Deduction Properly

You’ll have to file the deductions properly, depending on the type of business you have:

• Sole proprietorship: Schedule C
• LLCs: Form 1065
• S-corporations: Form 1120-S
• C-corporations: Form 1120

You should include the deductions on lines for “Other deductions” or “employee benefits.”

Tips to Maximize Tax Deductions

Understandably, you’ll want to maximize your tax deductions to minimize spending. That way, you can have a fun event affordably!

Our tips are:

• Plan structured activities
• Use low-cost, high-impact venues
• Bundle work with fun
• Leverage in-house talent
• Hold team-building events during work hours
• Avoid weekend getaways unless absolutely necessary

Red Flags That Can Get You Denied

On the other hand, there are certain things that can almost certainly lead to deduction rejections. They include:

• Only execus attend
• Luxury destination with no agenda
• No documentation kept
• High expense-per-person ratio
• Including non-employee guests

Deduct Team-Building Events Wisely

So are team-building events tax-deductible? They can be! As long as you follow what the IRS says is acceptable for tax deductions, you can plan a fun trip for your employees that can also result in better morale and productivity.

Just make sure that you study up on the information given in this article. That way, you’ll avoid disappointment with deduction rejections.

If you’re interested in planning a fun team-building event in Mexico, then request a quote from us now! Grupo Events is a leading corporate team-building company that’s trusted by names like MTV, Coca-Cola, and Viacom.