Can I Claim This Meal Expense?
Have you ever traveled on business and been forced to eat out a lot? Have you ever needed to entertain business associates or employees? Did you ever think to yourself “Can I claim these continuous, extravagant expenses on my taxes?”, but didn’t have the answer? Look no further, because Ably Bookkeeping has it for you:
There are lots of rules about tax deductions, but the area with the most is regarding meals and entertainment. The IRS will pay close attention to this line item on a business tax return.
When you file your business taxes at the end of the fiscal year, you can claim meal expenses if you were in one of these scenarios:
- During your business travels away from home, you needed to stop for rest in order to perform duties
- You bought a business a client, customer or employee lunch or dinner
Get 50% Back On Your Meals
You can figure your meals expense using either of the following methods.
- Actual cost.
- The standard meal allowance.
The first thing to remember: entertainment expenses are only 50% deductible. You bookkeeper, CPA or tax software will ask you for the total, and be sure to provide the total amount. (do not include the 50%)
Want to deduct 100%?
There is one exception: are you holding an event to promote your business? Did you invite the general public? This would actually considered an advertising expense and would be 100% deductible. If you have a bar or restaurant and were to hire a band to entertain your customers, the cost would be 100% deductible. Another example would be if you are giving a product demonstration of your services before you serve appetizers and drinks to your potential clients. Still not sure if you’re deductible? Are you conducting business (making sales transactions) while your hired entertainment is performing? You are? Then steak that claim, my friend; no pun intended.
What does not qualify?
What will the IRS not accept? A cocktail party where you have customers, potential customers or business associates that are there solely to mingle is a good example. Are you having a casual lunch with your bookkeeper and talking about current trends in fashion? The IRS will not except these as entertainment deductions.
The IRS does not feel that business can be discussed on hunting or fishing trips or while aboard a yacht or any other pleasure boat. Even if you can show a valid business purpose, it will not float…sorry.
They also do not believe that business can be discussed in a dance club setting, or during a sports event. However, you are permitted to have a business meeting associated with that kind of entertainment. A legitimate write off situation would be giving a demonstration of your product to a potential customer, giving them a sales pitch and then taking them out for drinks, dancing or to a ball game afterwards.
Time Is Not a Factor
The IRS doesn’t care about time. In other words, your business meeting does not need to be longer than the duration of the entertainment. As long as you have a legitimate business meeting, it can be over when the event or meal is finished.
Money IS an Object
You cannot deduct expenses for meals that are lavish or extravagant. This may differ from business to business, but a good rule of thumb is that if you feel uncomfortable about claiming an expense, it is probably lavish or extravagant. An expense is not lavish or extravagant if it is reasonable based on the facts and circumstances. Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.
If you have lunch once a week with a client or business associate and you take turns picking up the check, you likely will not have a deduction. Remember, there must be a substantial business discussion with the expectation of making a sale in order to qualify the entertainment expense.
Entertaining your employees is 100% deductible. So if you have an office party for your employees, you are allowed to write off the entire expense. If however, it’s a mixed party, say with 10 employees, 10 clients and 10 family members for a cost of $300 then you are allowed to write off 100% of the cost attributable to the employees share ($100), 50% of the cost attributable to the clients share ($50) and nothing for the family members share for a total write off of $150.
The same rule governs employee meals. If you provide meals for employees for your own convenience – say it’s tax season and you want your employees to stay in the office for lunch so you order in a pizza – then you have a 100% write off.
Expenses less than $75 don’t require receipts, just make sure you have all the info written down – time, place, who, etc. With that said, it’s easier to just keep the receipt.
Be very careful about writing off dues to certain clubs: country clubs, golf and athletic clubs, airline clubs, hotel clubs are not deductible.
Entertainment facilities such as timeshares, cabins, yachts, swimming pools, etc. are also not deductible business entertainment expenses. There is a case of a business owner audited by the IRS who was disallowed the pro rata share of mortgage interest, property taxes, depreciation and other expenses for the business use of a cabin he owns. Even though he maintained logs demonstrating business use and had allocated the expenses accordingly, the IRS did not allow him to write it off because the cabin was considered an entertainment facility.
Put Yourself In Their Shoes
Picture yourself in front of an auditor that’s trying to decide if your deductions are legit. Did you keep a copy of the invitation to your event that says there will be a product demo before the party? Do you have the name of the people entertained listed on the receipt? Do you have the trade show flyers listing the associated entertainment? If you entertain people in your home, be sure to keep more than the grocery store receipt. An auditor will otherwise roll their eyes, sigh in frustration and say “not allowed”. So be sure to keep a copy of the invitation that contains a line item mentioning the business purpose. Keep all of these things in your tax file in the event of an audit.
Imagine it, no more tax-time panic. Ably makes it a breeze. Contact Ably today and never stress over deductions again!
For more information, check out IRS Publication 463.