Many of my clients ask me about the rules regarding meal and entertainment tax deductions. Generally, the only time you are allowed to take this type of deduction is if you own a business. Individual may take these types of expenses as an itemized deduction if it is job related and is over 2% your gross income.
If you do own a business, the expense of providing entertainment to a client, customer, or employee can qualify as an ordinary and necessary business expense. Expenses such as meals (food, beverage, tax and tip) and entertainment at facilities like nightclubs, social clubs, sport facilities, or theatres can be deducted. Even expenses for vacations, hunting and fishing trips can be taken if it is an ordinary and necessary business expense. Unfortunately, the cost of renting or owning a facility is not deductable nor is the cost of club dues.
In order to show that your deductions are directly related to your business, you must:
1. Prove that the main purpose of the event was business
2. Engage in business with a person or persons during a meal or entertainment activity
3. Have a reasonable expectation of receiving income or some other specific business benefit in the future.
Basically, you will need to prove that business was discussed or occurred during the event or you held the event or meal in hopes to obtain future business.
The IRS will not allow a qualifying deduction if they rule the expense too lavish or extravagant. The IRS will not disallow your deduction just because you took a client to Cattleman’s; but, they may not allow a deduction if you spent one million dollars on an event that will only bring in twenty thousand dollars in sales. Skyboxes and luxury box rentals may fall under this rule if these facilities were rented for more than a single event.
These meal and entertainment deductions are not 100% deductable there is 50% limit. This means you can only deduct half of what you actually spent on your tax return. Taxes and tips related to a meal or entertainment, cover charges for admission to a night club, room rental for a business dinner or party and parking at a sports arena are all expenses that are subject to the 50% limit. If an expense is reimbursed it is no longer deductable.
Just like everything else, you must have RECEIPTS, RECEIPTS, RECEIPTS!!! The IRS requires you to show who attended the event or meal, how much was spent and where it took place. An easy way to document this is to write on the actual receipt who attended and what was the business purpose for the meal. For an event, you can keep all the receipts in an envelope and write the event details and business purpose on the envelope.
If you want to research this matter in greater detail, you can visit www.irs.gov and search for Publication 463, or you can call us at 915-857-8158 and we can help you answer any questions.
Sited from 1040 Quickfinder 2008