Do you know when to deduct meal and entertainment expenses and how much the deduction should be?
Generally speaking, there are three types of meal and entertainment expense deductions: 100% deductible expenses, 50% deductible expenses and non-deductible expenses.
First and foremost, the expense must be directly related to and benefit the business. You must be able to prove:
- How much was spent
- The time, date and location of the expenditure
- The purpose of the meeting
- The participants’ identities
50 Percent Deductions – These are expenses for meetings or discussions that will benefit the business. For example:
- Tickets to a sporting event associated with a business discussion
- Food eaten with a customer, client or employee associated with a business discussion
- Taxes and tips related to a business meal or entertainment activity
- Facility rental for a dinner or cocktail party (if the event met the business relation test)
100 Percent Deductions – These expenses usually benefit the employees of a company. For example:
- Free coffee, bottled water, donuts, etc. provided to employees at the place of business.
- Meals provided at the place of business to more than half of the employees as an incentive to work after-hours, on weekends, or on holidays.
- Free food or beverages offered to the public for promotional purposes.
- Meal and entertainment expenses for a company picnic or holiday party.
Nondeductible– These expenses are not business related and therefore non-deductible. For example:
- Meals without a business purpose (even if it’s shared with a customer, client or employee)
- Ticket price for sporting event that you do not attend
- Club dues; for example, country clubs, golf and athletic clubs
- Lavish or extravagant entertainment expenses (basically unreasonable expenses)
Keep in mind that taxes are complicated and there are a number of special rules in this area. If you are ever in doubt, consult a qualified tax professional for advice about deductible expenses, credits, etc.