Probably the most common business deductions are meals and entertainment. However, people are often confused about whether the expenses are fully deductible, partially deductible or not deductible at all.
50% Deductible
The general rule for deducting meals and entertainment expense is that 50% of the cost is deductible provided the following requirements are met.
Requirement #1
The expense has to be ordinary and necessary in the trade, business, or profession. In other words, it must be commonly accepted to have this expense and it must be appropriate in the trade or business. For example, business owners routinely have lunch with prospective clients to discuss business with the goal of attracting additional business. This is a common and necessary business expense.
Requirement #2
The expense must be directly related or associated to the active conduct of your business. To meet this requirement, you must engage in a business conversation during, before, or after the entertainment. If the business discussion is only incidental to the entertainment, the entertainment expenses do not qualify.
The 50% limit applies to business meals or entertainment expenses you have while traveling away from home on business, entertaining customers at your place of business, a restaurant, or other location, or attending a business convention or reception, business meeting, or business luncheon at a club.
100% Deductible
As with every general rule, there are exceptions. The following exceptions result in the meal or entertainment expense being fully deductible.
Exception #1
The expense is fully deductible when providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community.
Exception #2
If the meal is provided to employees as a convenience to the employer on the business premises and is furnished to more than half of the employees, then the expense is fully deductible.
Exception #3
A company holiday party expense is an exception to the general rule and is fully deductible.
Non-Deductible Expenses
Items that are not deductible include membership in any club organized for business, pleasure, recreation, or other social purposes. The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. You cannot deduct dues paid to country clubs, golf clubs, airline clubs, hotel clubs, or clubs operated to provide meals under circumstances that might otherwise be considered to be conducive to business discussions.
To ensure that your qualified meal and entertainment expenses are deductible, you will need to have excellent documentation. Please contact your Tax Coach for more specifics about which documentation is required for meals and entertainment.
Tags: business convention, business conversation, business deductions, business luncheon, business meals, business premises, necessary business expense, place of business, prospective clients, trade business