There are various tax deductions and incentives that businesses can take advantage of, that help them reduce their tax liabilities. Some of these tax incentives apply to team building activities that businesses and business managers employ with the main objective being an improvement of team’s morale that can lead to better productivity.

On the face of it, it may seem like an added expense that must be borne because that’s just how things roll. On the contrary, there are proven benefits of investing in your employees in more than paychecks, that lead to better productivity and improved bottom line for the organization.

Therefore, it becomes quite necessary to continue to invest in and hold team building events, but it doesn’t have to be expensive. At the very least, there are ways to capitalize on savings, and the tax-deductibility of certain team building events is a major way that businesses can take advantage of.

The Core of The Matter

When looking to reduce tax payables with respect to corporate team building activities, the simplest way to understand what activities and expenses are tax-deductible and which are not, is by knowing that any expenses incurred on entertainment, social gatherings, or fun training sessions that are primarily related to the benefit of employees in line with business objectives, is one hundred percent tax-deductible.

For instance, simple entertainment such as tickets to a movie show for employees are not tax-deductible as you can recall from our previous blog on whether business gifts are tax-deductible or not, unless they can be categorized as De Minimis Fringe benefits.

However, if the business owner decides to expense the tickets for employees who would be participating in a team building event such as a training session at a resort, that expense is tax-deductible. This is because in the first case, it can count as an equivalent to a cash gift unless the amount is negligible – but in the second case, the business owner is not passing on the cost of the ticket to the fun training event to the employees who would benefit from attending that training session, while also enjoying the event.

Are All Types of Team Building Activities Tax-Deductible?

The short answer: no.

As much as we’d all like them to be, things are not so simple in the realm of taxes.

Essentially, as highlighted above, anything that is purely for entertainment purposes is not tax-deductible as that is a gift in a way. Such events, activities, and items do not contribute to business success directly. Examples of this could be company outings and employee meals at restaurants, and entertainment such as movie night or beach day and so on.

On the other hand, any event or outing or activity that primarily:

• boosts and improve team collaboration,
• helps employees develop certain skills such as communication skills, or planning and budgeting skills, etc.,
• or in any way contribute to the business’s bottom line

can be tax-deductible. The simple way to understand this is that it is an investment in the business that is expected and highly likely to bring in increased ROI.

How Are Team Building Activities Beneficial for the ROI of Businesses?

Businesses are a machine, and for any machine to provide optimal and timely output, it needs to be well-oiled. Same is the case with the employees of a business organization that converts inputs (investment) to outputs (profit).

If a business has employees who are not good at working with each other, at the end of the day, it is the business that suffers the most. On the other hand, if that same business starts investing in training and developing these employees in:

• collaborating better with each other,
• manage conflicts constructively and productively, maturely, professionally, if and when they arise,
• increase their creativity levels and generate more ideas beneficial to business operations,
• and communicate better,

it becomes a well-oiled machine compared to previously, whose components rely on each other with surety, respect, and trust, and thus with less input, can turn out more output (for instance, more sales in less time), thus improving and increasing ROI.

Therefore, any team building activity that helps the business improve its health, is beneficial for the company. In the case of team building activities, the culture and environment of the business is expected to and highly likely to improve, leading to better overall performance of every individual, team, and thus the organization and business.

What are the Safest Team Building Activities that are Tax-Deductible?

Some common team building practices that businesses employ to help improve their teams’ skills and performance, include, but are not limited to:

• Company retreats with a mix of team building activities
• Training sessions with a bit of fun element
• Skill-specific workshops
• Outdoor adventure trips and activities that involves skill development related to better team collaboration

How Often Can My Business Hold Tax-Deductible Team Building Activities?

Now that is definitely an interesting consideration to make, especially when preparing annual budgets.

Generally, the industry standard is that if the team building event is a big one, and also, the team involved is a large one, such events should be limited to once a year (more like once a year is sufficient since it becomes a huge deal).

However, depending on how an organization goes about conducting team building events, there are companies who plan and budget for at least one small to medium sized team building event per quarter or bi-annually as well. This especially makes sense if the company by policy allows each department to hold their own need-based team building activities, allowing each department a quota of one to two such events per year, but overall it then may appear as if the company is the one holding several team building events throughout the year – but that shouldn’t be a problem if such is the setting….

The bottom line is that the objective of such events must be directly linked to business objectives, and these links can be proven – more on this in the next section.

As long as it’s not “all party and no work”, and things are not unreasonably over the top, it is not something that is too complicated, especially since there are many factors that often come into play, such as primary country-of-origin culture of the business owners and their philosophy, or even the fact that an organization may be mostly remote and therefore may need to hold a few more team building events than another in the same industry.

Of course, it also depends on the size of the business and the budget it has each year.

How Do I Develop an Optimal Corporate Tax Strategy?

The term Corporate Tax Strategy may sound heavy and complicated. In reality, it is as simple as planning what to do on an annual, bi-annual, quarterly, and monthly basis, to ensure that during any given tax year, you as a small/medium business owner are maximizing the benefits of tax-deductible items. Here’s a list of 5 basic activities, that are not overwhelming but easily make up the corporate tax strategy, that a business can and must employ on a regular and diligent basis to ensure the above-mentioned objective:

1. Identify tax-deductible and non-tax-deductible items before you commit to decisions about team building activities.
2. Categorize events accurately as per IRS regulations (since some activities are 100% tax-deductible, but others are only 50% tax-deductible).
3. Track your expenses diligently, religiously.
4. Ensure thorough and timely documentation as you do not want to be running around like headless chickens at the last minute in case of an audit, and missing out on important reporting and filing, which could lead to loss of tax-deductible amounts, if not penalties. Some important aspects to ensure documentation about include purpose of event; location, date, and time of event; and the business relationships with the people involved in and invited at the event.
5. Whenever possible, make sure to be able to prove a useful link between the activities and tangible business objectives, because while this is not a strict (or even a lenient) requirement, it sure helps to make a strong open-and-shut case in case of potential audits.

An often overlooked but very important step you can take that can help maintain a healthy corporate tax strategy is employee participation – this goes beyond just ensuring that the expenses incurred on team building activities are for currently employed workforce rather than alumni as well: it includes active participation of employees when it comes to submitting receipts (such as for business meals) to the finance and accounting department for tax management purposes.

Want To Gift Your Business Associates? Start Here!

There’s no shame in wanting to reduce your tax burden, especially if the rules of the game allow and actually encourage it. In fact, since it is allowed, it is absolutely essential to the overall health and growth trajectory of a business. Ensuring that you incorporate a healthy corporate tax strategy into your long-term financial goals, can play an important and vital role in taking your business profits to the next level, and your business to greater heights year after year.

Want to offload tax filing and management tasks to experts you can hire on a per-hour and per-project basis?

Contact us today at info@monily.com or give us a quick call at + 1 (832) 391-3460. Alternatively, you can also book a free, no-obligations consultation slot with our small business accounting experts here.

Read more: Do Client Gifts Qualify as Tax Deductible?

Nida Bohunr

A highly skilled accounting professional at Monily, having extensive and diverse experience of working in US healthcare and agriculture industry. Nida is a CA finalist with expertise in Bookkeeping, Auditing, Bank Liaison, Tax Preparation, Accounts Payable, Accounts Receivable.