Part 9: The 10 Most Expensive Tax Mistakes, Are You Satisfied with The Taxes You Pay?
Now let’s take a minute to discuss some fun deductions for meals and entertainment.
The concept here is that you can deduct the cost of meals you host with a bona fide business purpose. This means conversations with clients, prospects, referral sources, and business colleagues. And let me ask you – when do you ever eat with someone who’s not a client, prospect, referral source, or business colleague? If you’re in a business like real estate, insurance, or investments, where you’re marketing yourself, the answer might be “never.” Be as inclusive as you can with what you define as bona fide business discussion!
The general rule is, you can deduct 50% of your meals and entertainment, so long as it isn’t “lavish or extraordinary.” The IRS knows you have to eat, so you can’t deduct it all.
But they’ll meet you halfway. You can deduct the cost of food, drinks, taxes, and tips. (Yes, that includes the coat check and valet parker.)
You generally can’t deduct the cost of meals you eat with your spouse unless you’re traveling together for business. However, you can include the cost of a spouse or other “closely connected” person if your guest brings their spouse.
Documenting expenses is probably easier than you think. You don’t need receipts for expenses under $75. But you do need to record five pieces of information in your business diary or records. (Credit card statements work for the first three as long as you corroborate them with the fourth and fifth in some sort of diary or log):
- How much you spent
- When you spent it
- Where you spent it
- Your business relationship with your guest (prospect, client, referral source, vendor, etc.)
- The business purpose of the meal
Do you entertain at home? Do you ever discuss business when you do? (Of course.) Are you deducting those meals, too? (Probably not.) There’s no requirement that you have to eat out to deduct the costs of a meal. So don’t forget to deduct home entertainment expenses too! If you invite up to a dozen guests, use the same rules as if you were eating out. If you invite more than 12 guests, you can deduct “reasonable” costs if your primary purpose is business. Include employees; let guests know your business purpose; discuss and display your product or service to support your deduction.
You can deduct the cost of meals that you furnish employees (and yourself, unless you’re taxed as a proprietor) for the convenience of the business and not for compensation. These include meals you furnish on-premises to let employees stay available for emergency calls, meals you furnish during short lunch periods (up to 45 minutes), meals you furnish where there aren’t adequate eating places near the workplace, and any meals you furnish to over 50% of employees. You can also deduct off-premises meals you provide as part of required business meetings.
You can deduct 100%, rather than the usual 50%, of your expenses for meals and entertainment for sales seminars and similar events where the meal is integral to the presentation or the business. (If you’re a Somali pirate, for example, you can deduct 100% of the cost of meals you provide to crews you hold hostage on your ship.)
You can also deduct entertainment expenses for events like ball games, movies, or concerts, if they take place directly before or after substantial, bona fide discussion directly related to the active conduct of your business. You can deduct the face value of tickets to events, food and beverages, parking, taxes, and tips.
Oh, and you can deduct 100% of the cost of sporting events you organize to benefit charity or for employee recreation.
While we’re on the topic of hospitality, let’s talk about business gifts. Gifts you give to business associates are deductible up to $25 if you can show a business purpose for the expense or business benefit to be gained. (Married couples count as one person for this rule—you can’t deduct $25 for each.) This includes your family and friends if they qualify as bona fide clients, prospects, or referral sources. Gifts are nontaxable to the recipient.
- If you give gifts of entertainment or sporting tickets, you can choose to deduct up to $25 as a gift, or 50% of the cost as an entertainment expense. If tickets you give cost more than $50, you’ll save more by counting them as entertainment.
- If you give a gift to a group of recipients, such as a family or an office, you can deduct $25 for each member of the group.
- Advertising specialties like pens and other tchotchkes with a value up to $4 each are deductible as advertising expenses and don’t count against the $25 per person annual limit for business gifts. Contest prizes you give to customers (but not employees) also qualify.
ABOUT PROVIDENT CPA & BUSINESS ADVISORS
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