You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee.

You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following two tests.

1. Directly-related test.

2. Associated test.

Caution

Club dues and membership fees. You cannot deduct dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or other social purpose. This rule applies to any membership organization if one of its principal purposes is to conduct entertainment activities for members or their guests, or to provide members or their guests with access to entertainment facilities.

The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. You cannot deduct dues paid to country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions.

It no longer pays to be sociable. Beginning in 1994, no deduction is allowed for dues paid to any club run for business, pleasure, recreation, or other social purpose. This rule applies to all types of clubs, including business, social, athletic, luncheon, and sporting clubs. However, the IRS has allowed deductions for the following groups, provided entertainment is kept to a minimum: Business leagues, trade associations, chambers of commerce, boards of trade, real estate boards, professional groups (such as medical and bar associations), and civic and public service organizations (such as the Kiwanis and Rotary).

The cost of club meals may be written off only if they otherwise qualify as deductible business meals.

Good old days: Under pre-1994 law, dues paid to social, athletic, sporting, and country clubs were allowable deductions if you could show that the club was:

1. Primarily used for business purposes, and

2. Directly related to the active conduct of your trade or business