Friday, March 18, 2011

Deductible Business Meals and Entertainment

You may be able to take a tax deduction for certain meals and entertainment expenses incurred for a client, customer, or employee.  For costs to be deductible, they must either be directly related to your trade or business or associated with your trade or business.  To be directly related, the main purpose of the event should be for business or you should expect to receive income or other business benefit in the future from the event.  For the expense to be associated with your trade or business, you must provide a meal or other form of entertainment directly before or after a significant business discussion.  It isn’t necessary to spend more time on business than to entertainment, but the taxpayer should be able to prove the business objective.
Meals can include food, beverage, tax and tip.  Entertainment includes activities to provide amusement or recreation.  Some examples are nightclubs, social or athletic clubs, theaters, sporting events, yachts, fishing trips, or other similar events.  However, the cost of renting or owning the entertainment facility is generally not deductible.  The meals or entertainment deducted must not be considered lavish or extravagant.  The expenses must be reasonable considering the facts and circumstances.

Once you have figured what expenses are deductible as meals and entertainment, the deduction is limited to 50% of these expenses.  There are a few exceptions to the 50% rule.  Some transportation workers are subject to an 80% limit.  Meals provided on the employer’s premises and for the benefit of the employer are not subject to any limit, as long as more than 50% of the employees are provided meals for the employer’s convenience.  Generally, holiday parties and picnics for employees are fully deductible.  Promotional activities made available to the general public are also not subject to any limit.  For example, wine merchants may fully deduct the cost of food and wine at a wine tasting event.

You can find more information regarding meals and entertainment deductions in IRS Publication 463.  Like all tax deductions, make sure you have adequate records to support your deduction.  Under audit, the IRS would expect to see records of the cost, date, place, and business purpose for all expenses.