The concept of meal and entertainment expenses and the ability to deduct those expenses on a tax return is often a misunderstood topic. There are three categories the costs can fall into – and some of them can be deducted in full. Don’t lose out on a deduction when all it takes is a little knowledge and planning to categorize them correctly.
Generally, meals can only be deducted, whether in full or partially, as business expenses if they are directly related to, or associated with, the active conduct of a trade or business. They must be substantiated by adequate records which must include amount, time and place, business purpose and business relationship of people involved. There must be a valid business purpose to the meal for it to be a deductible expense. Once this test is established, the expense falls into one of three categories: 50% deductible, 100% deductible, or not deductible.
This is the most common category. Examples of events that would be subject to the 50% limit are:
- Meals with clients, customers, vendors or employees associated with a business discussion.
- Meal expenses by an employee during a business trip and reimbursed to that employee.
- Meals at a convention or seminar.
- Ticket price for a sporting event associated with a business discussion.
- Room rental for a dinner or cocktail party.
Examples of business meals and entertainment expenses that are 100% deductible are:
- Meal expenses for a company picnic or holiday party for the benefit of employees.
- Office snacks such as coffee, soft drinks, bottled water, donuts and similar snacks or beverages provided to employees on the business premises.
- Food made available to the public for free, usually as part of a promotional campaign.
- Meals provided on the employer’s premises to more than half of the employees for the convenience of the employer. A good example of this is if you are providing meals to the employees who are working late, on weekends, or on call.
- If the meals expense is included as taxable compensation to the employee and included on the W-2.
- If a professional firm bills meal expenses separately when invoicing the client and is reimbursed by the client, the expenses are fully deductible. However, if the expense is not separately stated, then those expenses are only 50% deductible.
Nondeductible meal expenses
Regrettably, some business meal and entertainment expenses are nondeductible and need to be categorized as such. Examples include the following:
- Club dues (country clubs, golf and athletic clubs).
- Ticket price for sporting event that you do not attend.
- Lunch with customer, client or employee without a business purpose / discussion.
In order to properly categorize your expenses and get the highest possible deduction allowance, set up three general ledger accounts for meals and entertainment: one for 50% deductible, one for the 100% deductible meals and one for nondeductible meals. We are available to assist you with this and other areas to help you get the biggest allowable advantage on your tax returns.