Deducting Meal and Entertainment Expenses

If you are a business owner or self-employed independent contractor, you are probably looking for ways to deduct expenses from your taxes. Entertainment deductions and business meal deductions are popular deductible expenses but what about other things like the cost of a company summer picnic or company holiday party? Are these legitimate ways for a business taxpayer to lower their tax burden?

The Tax Cut and Jobs Act (TCJA) made significant changes to what qualifies as a deductible business expense. CPAs and other tax professionals will be up to date on these changes and can advise you on what you can deduct and how you should document the expense and its business purpose.

The Federal income tax laws can be extremely stringent regarding deductible meals and entertainment expenses.  Typically, you can deduct 50% of these expenses if they meet certain requirements. How can you make sure your business expenses qualify, and can you deduct the full cost or on a portion of the expense?

The biggest consideration is that the expense must be reasonable. What does “reasonable” mean? It means when you consider the cost of meals or business entertainment that it is not out of line with the type of business and events you typically host.

• "Ordinary and necessary" business expenses? You need to ask yourself whether this type of expense is normal, in your line of work or to promote it to gain additional business.
• "Trade or business": What is your profession? Are the expenses in line with your profession or your vocation?
• Were the expenses incurred in a clear business setting? Were they incurred on company property or in a rented business conference room?  What about at a business conference or meeting at a location owned by a colleague where you have an ongoing business relationship. Something like a company picnic or company holiday party should include all employees. of your business.
• If outside a business setting was it "directly related" to your business? How strong was your expectation that the expenditure would result in generating income? This is an important question. Secondly, did you actively engage in a business meeting or negotiation? If there was a bona fide business transaction, you might be in better shape before the IRS, in light of the deductions. The IRS will also look at the principal character of the event, to determine if it was active conduct of your trade or business. Finally, under the "directly related" test, the expenses incurred must be allocable to you and to the business associate. 

If you find, after asking yourself these questions, that you might not meet the "directly related" standard under federal income tax laws, you can still ask yourself these questions:

• Clear business purpose: You might be able to deduct expenses for your spouse and kids, if you can show that your event had a clear business purpose. An example would be in you have business travel with travel expenses and your family shares your hotel room and rental car you may still deduct a portion of that cost. Still, it's a tough call and the IRS doesn't make it easy.
• Substantial, bona fide business discussion: Look at how substantial your business discussion was during your business meal or outing. It might not be enough to "shoot the breeze" and talk about golf.  Sometimes, it's worth it to have proof that a substantial business discussion took place at entertainment events such as attending a sporting event or business meal in order to properly deduct the meal expenses or entertainment costs.  Proof could be copies of a contract, notes from discussion, or any work you prepared at the meeting.

When you provide documentation to your tax preparation professional make sure to give them as much information as you can to make sure your business deductions and your tax return as a whole has been calculated properly. If needed you can also consult a tax attorney who can translate the IRS regulations and laws for you into simple terms.

Related Resources:

• Deduct Business Travel: Allowable Tax Deductions (FindLaw's Law and Daily Life)
• Understanding Small Business Tax Deductions  (FindLaw’s Learn About the Law)
• Non-Deductible Business Expenses (FindLaw’s Learn About the Law)