Business Meals and Entertainment: How to Maximize Tax Deductions
Many businesses consider the occasional wining and dining of customers
and clients just to stay in touch with them to be a necessary cost of
doing business. The same goes for taking business associates or even
employees out to lunch once in a while after an especially tough
assignment. It's easy to think of these entertainment costs as
deductible business expenses, but they may not be. As a general rule,
meals and entertainment are deductible as a business expense only if
specific conditions are met. What's more, the deduction for either type
of expense is generally limited to 50 percent of the cost.
Meals and entertainment directly connected to business.To be considered directly connected to business, the meal or entertainment event must meet three conditions:
For example, an executive employee who treats a client to a golf game
in order to discuss the general parameters of a business deal in an
informal atmosphere is engaged in entertainment that is directly
connected to business. A manager who discusses sensitive business plans
with a subordinate over lunch at an off-premises restaurant would also
qualify as being directly connected to business.
- It must have been scheduled with more than a general expectation of
deriving future income or a specific business benefit from the event.
In other words, a meal or dinner date arranged for general goodwill
purposes does not qualify.
- A business meeting, negotiation, or transaction must actually occur
during the meal or entertainment, or immediately preceding and
following it. In other words, business actually must be discussed.
- The main character of the event, considering the facts and
circumstances, is the active conduct of your company's trade or
Applicable limitations. In general, only 50 percent of expenses incurred for entertainment and meal expenses is deductible. A limited exception applies to entertainment or on-premise meals provided to employees.
Expenses with respect to entertainment facilities generally are not deductible at all. A facility includes any item of personal or real property owned, rented, or used by a taxpayer if it is used during the tax year for or in connection with entertainment. They include yachts, hunting lodges, fishing camps, swimming pools, tennis courts, bowling alleys, automobiles, airplanes, apartments, hotel suites and homes in vacation resorts.
Country club dues are not deductible (although the meals purchased with business clients at the club are, up to the 50 percent limit). Deductions for skyboxes or other private luxury boxes at sporting events are limited to the face value of a non-luxury box seat ticket multiplied by the number of seats in the box.
Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met to the letter.Please contact our office for assistance on how to comply with these requirements at minimum cost and expense, and how your business’s typical mean and entertainment expenses fare under the deduction rules.