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Deducting Meal and Entertainment Expenses

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By Tanya Roth, Esq. on March 26, 2010 12:45 PM

It may sound like a good idea to take advantage of the allowable tax deductions for meals.

But beware!  The Federal income tax laws can be extremely stringent with regards to the deduction of meals and entertainment expenses. 

Meal expenses are generally for food, beverage and even tips. Entertainment expenses are generally for amusement, recreation or entertainment. 

Now that you have the definition, you're probably wondering whether or not your expenses are allowable tax deductions. But first, know this:

Only 50% of the ordinary and necessary business expenses for meals and entertainment will be deductible.

This means that if you incurred $1000 of bona fide business expenses for meals, you can deduct $500 of it. Of course, there are small exceptions to this in the federal income tax laws, so check with your tax advisor.    

  • "Ordinary and necessary" business expenses? You need to ask yourself whether this type of expense is normal, in your line of work. 
  • "Trade or business": What is your profession? Are the expenses in line with your profession or your vocation?
  • Were the expenses incurred in a clear business setting? Were they incurred on company property or in a rented business conference room? 
  • If outside a business setting was it "directly related" to your business? How strong was your expectation that the expenditure would result in generating income? This is an important question. Secondly, did you actively engage in a business meeting or negotiation? If there was a bona fide business transaction, you might be in better shape before the IRS, in light of the deductions. The IRS will also look at the principal character of the event, to determine if it was active conduct of your trade or business. Finally, under the "directly related" test, the expenses incurred must be allocable to you and to the business associate. It's a tough call if you decide to deduct the expenses incurred by your kids and dog. 

If you find, after asking yourself these questions, that you might not meet the "directly related" standard under federal income tax laws, you can still ask yourself these questions:

  • Clear business purpose: You might be able to deduct expenses for your spouse and kids, if you can show that your event had a clear business purpose. Still, it's a tough call and the IRS doesn't make it easy.
  • Substantial, bona fide business discussion: Look at how substantial your business discussion was. It might not be enough to "shoot the breeze" and talk about golf.  Sometimes, it's worth it to have proof that a substantial business discussion took place.  Proof could be copies of a contract, notes from discussion, or any work you prepared at the meeting.

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