Meal and Entertainment Expenses

Growing a business sometimes requires that you wine and dine business associates. Generally, to justify claiming dining and entertainment expenses the IRS wants you to show that a business discussion or negotiation occurred to obtain income or some business benefit.  For example, you may entertain prospective customers in an effort to get new business. You may provide goodwill entertaining to encourage existing customers to continue doing business with you. Generally, You may only deduct 50% of meals and entertainment costs. However, there are exceptions.

To be deductible, meal and entertainment expenses must be:

  • Ordinary and necessary to your business (not lavish): an ordinary expense is an expense that is common and accepted in your type of business. A necessary expense is an expense that is helpful and appropriate in your business. To be considered a necessary expense, it does not have to be required.

AND

  • You must meet either one of the two restrictive tests
    • Directly-related test may be met in one of three ways: If the directly related test is not met, dining and entertainment expenses may still qualify for a deduction if the associated test is met.
      • Generally related: You must be able to show a business motive for the dining or entertainment where any of the following occurred: a business meeting, a business negotiation, or a business decision. Must show more than a general expectation of getting future income or some other specific business benefit. In other words, you did not incur the expense just for goodwill purposes.
      • Expenses incurred in a clear business setting: You’ll meet this test providing your only motive for incurring the expenses was for the furtherance of your business.The people being entertained in a clear business setting are usually people with whom you have nor personal or social relationship. This could involve giving a free diner to a customer who regularly attends your hotel.
      • Expenses incurred for services performed: If an expense is directly or indirectly made for the benefit of an individual (other than an employee)
      • The directly-related test for entertainment generally will not be met if: You are not present during the entertainment, the distractions are substantial, for example, at night clubs, sporting events, or during a social event, the noise level may be too high to allow for a business discussion, If you meet with a group at a cocktail lounge, country club, athletic clubs, or vacation resorts.
    • Associated test you must be able to show that directly before or after the dining or entertainment a substantial and bona fide business discussion occurred related to the active conduct of your business. A substantial business discussion doesn’t have to be for any particular length of time and it doesn’t have to be longer than the entertainment. Moreover, you don’t have to discuss business during the period of entertainment. Under this test you can entertain in a non-business setting, like a nightclub, restaurant, theater, or sports arena.
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