As a small business owner, it can be difficult to remember the numerous rules regarding allowable meal and entertainment expense deductions. In order to be deductible, business meal and entertainment expenses must pass a series of tests. Once it has been determined that the expenditure qualifies as a business meal and entertainment expense, it is only 50% deductible The guidelines outlined below will help explain some of the intricacies you may find when considering the deductibility of the meal and entertainment expenses incurred by your business.
• In order to be deductible, all business expenses must be ordinary and necessary in carrying on your trade or business. This rule applies to meal and entertainment expenses as well. If it is reasonable in your industry to entertain clients or other business professionals, then there should not be an issue in passing this general test.
• Business meal and entertainment expenses also need to be directly related to, or associated with, your trade or business. The “directly related to test” means that a specific concrete business benefit is expected to be derived and the principal purpose for the event is business. This test can also be met if the meal or entertainment takes place in a clear business setting directly furthering your business. Meetings or discussions taking place at social events do not meet this test.
• If your business meal or entertainment expense does not pass the directly related to test, it may qualify as being associated with your trade or business. In order for the expense to be considered to be associated with your business, the meal or entertainment expense must precede or follow a substantial and bone fide business discussion. An event will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship.
• Business meals and entertainment are generally ones in which you (or an employee of yours) attends with a client. It is required that you (or an employee of yours) are present. An important side note is that if you incur meal expenses for your own employees, these expenses are generally 100% deductible.
• You should substantiate your meal and entertainment expenses with details such as the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. For expenses of $75.00 or more, you need to maintain the documentary proof such as a receipt.
• In order to be deductible, business meal and entertainment expenses cannot be lavish or extravagant. This is an area of subjectivity as there is no specific price limit imposed.
Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.