Fall is here. The kids are back in school, and it's time to get down to business. As the holidays approach, you'll want to know how to make the most of holiday entertainment expenses.
Here is a review of the rules for deducting business meals and entertainment.
Meals and entertainment you host in the course of your business are deductible if they’re directly related to the active conduct of your business or they take place directly before or after a substantial, bona fide discussion directly related to the active conduct of your business. That means, clients or customers; prospective clients or customers; referral sources; and other business relationships (vendors, professional colleagues, etc.).
The general rule is that you can deduct 50% of most meals. Specific deductions include meals, drinks, taxes and tips.
Now for the fine print:
- Surroundings must be conducive to business discussion.
- To prove your deductions, you’ll need a diary, day planner, or similar log to verify your deduction. IRS Publication 463 directs you to record the cost of the meal, date of the meal, establishment where the meal takes place, the business purpose for the expense (or business benefit you gain or expect to gain from the meal), and your business relationship with your guest.
- You’ll need receipts for expenses over $75. (Many clients mistakenly think they have to keep receipts for expenses over $25.) Credit card statements work if you corroborate them by recording the business purpose of the expense in your business diary.
- You can’t deduct meals with your spouse unless you’re traveling together for business. However, you can include the cost of a spouse or other “closely connected” person (such as children or parents) if your guest brings their spouse.
- Don't forget the cost of entertaining at home! You can deduct costs for small gatherings at your home under the same rules that apply when you go out to eat. If you invite more than 12 guests, you can deduct “reasonable” costs if your primary purpose is business. To show compliance, include employees; let guests know your business purpose; discuss and display your product or service at the event.
Really, why celebrate something as trivial as a birthday, bat mitzvah, or wedding anniversary when you can celebrate 10 years in business, or 15 years at the same location? Just take it from Rick Moranis, playing nebbishy accountant Louis Tully in Ghostbusters:
"Hey, everybody, this is real smoked salmon from Nova Scotia, $24.95 a pound! Only cost me $14.12 after tax, though . . . . that's why I invited clients, instead of friends."
- Expenses for sporting and theatrical events, golf and boating outings, and similar entertainment are also 50% deductible if they take place directly before or after a substantial, bona fide discussion directly related to the active conduct of your business. Deductions include the face value of tickets (but not a scalper's premium) to sporting and theatrical events, food and beverages, travel and parking expenses, taxes, and tips.
You can deduct a full 100% of the expenses listed below:
- Meals and entertainment for sales seminars and similar events where the meal is integral to the presentation
- Costs for sporting events you organize to benefit charity
- Recreation expenses for your employees
Meal and entertainment expenses are easy to overlook -- especially when it comes to entertaining at home. But over time, those little expenses add up. Don't lose out on those easy savings!
