Finance 11 Deducting Business Entertainment & Meals

Business owners are allowed to deduct business-related entertainment and meals for entertaining  clients, customers, employees, and prospects-only if they both ordinary and necessary and meet either the directly-related test or the associated-test.

An ordinary expense is one that is common and accepted in the business owners trade or business.

A necessary expense is one that is helpful and appropriate for the business.

To meet the directly-related test, you must show that:

The main purpose of the combined business and entertain/meal was the active conduct of business.

You did engage in business with the person during the event, and

You had more than a general expectation of getting some income or some other specific business benefit at some future time.

If the entertainment/meal takes place in a clear business setting and is for your business or work, the expenses are considered directly-related to your business or work.

Even if your expenses do not meet the directly-related test, they may meet the associated-test. To meet the associated-test, you must show that the entertainment/meal expense is:

Associated the active conduct of your trade or business, (you can show that you had a clear business purpose for having the expense) and

Directly before or after a substantial business discussion (you actively engaged in the discussion, meeting, negotiation, or other business transaction).

50% Limit

The tax law allows you to deduct only 50% of your business-related entertainment/meals you have while:

Traveling away form your tax home whether eating alone or with others on business.

Entertaining at your place of business, a restaurant, or other location, or

Attending a business convention or reception, meeting, or luncheon.

The amount of the expense must be considered reasonable. Included in the 50% limit are taxes and tips, cover charges, rent paid for a room in which you hold an event, and parking. Amounts considered lavish or extravagant are not deductible.

Entertainment Expenses Are NOT Deductible

You cannot deduct club dues and membership fees paid to:

Airline Clubs

Athletic Clubs
Country Clubs
Golf Clubs
Hotel Clubs

Expenses for Spouses

You cannot deduct entertainment/meal expenses for your spouse or for the spouse of the person you are entertaining unless you can show you had a clear business purpose, rather than a personal or social purpose, for incurring the expense.

Required Documentation and Substantiation In An Audit

The tax laws requires the following written documentation and substantiation of all entertainment and meal expenses included on a tax return:

Date expense was incurred

Location of event
Total Amount
Business Purpose, and
Business Relationship

Failing to keep appropriate records could allow the IRS to disallow all or a portion of the expense in an audit.

This article was written by  Donald M. Scherzi, CPA, CFP, LLC 

Mike Lupo, SCORE Counselor

Visit us at: www.scoresouthflorida.net