Tax Tip of the Week- Let’s Talk Meals & Entertainment Deductions

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Businessdinner_crop380w I regularly have conversations with my business owners about meals and entertainment deductions. A lot of business owner’s know they can deduct meal and entertainment expenses they just don’t know when or how to document theses items.

First, let’s go over what qualifies as a meal or entertainment deduction: (taken from 1040 Quickfinder 2010)

The cost of entertaining a client, customer or employee can qualify as an ordinary and necessary business expense. Entertainment activities can include the cost of meals (food, beverages, tax, and tip). Entertainment can be provided at facilities such as nightclubs, social clubs, sport facilities or theatres, or on hunting, fishing, vacation and similar trips.

To qualify for a deduction, the entertainment expense must be directly related to associate with the active conduct of a trade or business, or for the production or collection of income.

So what does this mean in English? If you take a client, employee or business associate out to eat or for a night on the town and you did this for a BUSINESS purpose you can take it as a business deduction. You can even host an event for clients, employees or business associates and take the expenses as a deduction if the event is held to benefit your business.

Of course this must be done in good reason. You shouldn’t spend $10,000 on a client wining and dining them when you only expect $200 dollars in business. That’s not good business plus if you were to be audited the IRS can rule the deduction excessive not allow them.

Now when it comes to documenting these events YOU MUST SAVE THE RECIEPT!!! The IRS does not always want to accept bank or credit card statements as proof of a deduction! Also on the receipt you need to write who attended the event and what was the business purpose of it.

For example you take your staff to lunch to go over new policies you have set. You would need to keep the receipt, note who attended and the purpose, to go over new company policies and procedures. It’s as easy as that. But you need to make sure you do this step if you intend on deducting this expense.

And here is another kicker the IRS has, meal and entertainment deductions are limited to 50%. So, if you have $6,000 of meal and entertainment expenses the IRS will only allow you to deduct $3,000.

I know this a lot to take in but this is the general explanation of these types of deductions. If you need more information, just call my office at 915-857-8158 and we’ll do our best to clear this up for you.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.