One of the biggest perks of being a small business owner is the ability to turn a large portion of your meals and entertainment expenses into tax deductions. With proper planning and documentation, you are able to turn several of your meal and entertainment expenses into a business expense.
For example, if you are a financial adviser and you are planning to have lunch and play a round of golf with your buddy on Saturday, by asking him for a referral and discussing the importance of maxing out his IRA during lunch you can write off 50 percent of the cost for the entire day. Or if you and your wife will be going out to dinner with another couple, you may be able to write off the cost of dinner by discussing college savings options with your friends.
The possibilities for using the meals and entertainment deduction in your business are endless. But there are a few rules to keep in mind when taking meals or entertainment as a business expense.
1. The deduction is limited to 50 percent of the total cost- Except in rare exceptions, the amount you are allowed to deduct for meals and entertainment expenses is 50 percent of the total bill. So if you spend $500 taking a friend to lunch and golf, your total deduction would be $250.
2. You must be present to take the deduction- In order to qualify as a business meal or entertainment expense, you must be present in the meal or entertainment. This may seem like common sense, but I have seen many people buy sports tickets or something similar for a client and try to write it off as an entertainment expense. In that case, it would be considered a “gift expense” and limited to a $25 deduction.
3. Your spouse does not count as a meal and entertainment deduction- Even if your spouse is your business partner or even one of your clients, the IRS will not let you include him or her as part of your meals and entertainment expenses.
But there is an exception to this worth noting. If the client or prospective client you are having the meal with brings their spouse, you are then allowed to deduct the cost of bringing your spouse. So if you invite a client to dinner and a movie afterward, as long as they bring their spouse you are allowed to deduct the cost of your spouse. This exception can also apply to kids. If they bring their kids, you can deduct the cost to bring yours.
4. Meals must take place in a location conducive to doing business- Typically this means a restaurant or home setting. Ordering appetizers at a nightclub will most likely not meet this requirement. Same with ordering a sandwich from the cart girl while playing golf.
5. Entertainment must follow a business discussion- The nightclub or golf course expenses described in number four may still be deducted as entertainment expenses, but only if they follow a business discussion at a proper location. So if you are going to play 18 holes with a client, make sure to take them to lunch and discuss business first.
6. Sales presentations and seminars may be eligible for 100 percent deduction- If you are hosting a presentation or seminar to market your product or services, you may be allowed to deduct 100 percent of the cost of meals and entertainment involved. A good example of this is the network marketing business, where people often invite friends and potential clients over for a brief presentation of their business. In this case any food or entertainment expenses they had would be 100 percent deductible instead of the normal 50 percent.
7. Properly record the expenses- As with all tax deductions, documentation is the key. The IRS is pretty loose with receipts in this area, only requiring you to save them if the total cost is over $75. But you still have to have extensive record keeping with each transaction.
Typically the IRS wants you to record: Who was entertained (the person or people you spent the money on), where did it take place (location of meal or entertainment), when did it take place (date is sufficient here), why did it take place (what business did you discuss) and how much did it cost (price).
I highly recommend keeping some sort of tax diary or ledger in which you record all of these things after each business meal or entertainment occurs. If you do this, you will be completely covered in the unlikely event you are audited. And don’t forget, if the meal and entertainment is for business purposes, you will also be allowed to deduct the mileage it takes to get to and from the location.
Turning a portion of your meal and entertainment expenses into business expenses can save you a significant amount of money on your taxes. By remember these seven rules and using a little strategic thinking, you can maximize the amount of meals and entertainment that qualify for the deduction.
Question: Are you maximizing your business meal and entertainment expenses?