How to Write Off Expenses for Meals and Entertainment on Your Corporate Taxes
Provided by HG.org
One of the most common questions often asked of corporate attorneys by small business owners who are just setting up their first company is how to write off expenses. Usually, two of the most important expenses these people want to write off are meals and entertainment expenses.
Unfortunately, many business owners believe that just because there is a line item on the tax return for meals and entertainment deductions, just about any dinner, movie ticket, sporting event, or other entertainment expense involving a client qualifies as a valid deduction. That is not the case.
There are rules for which expenses constitute valid deductions. Essentially, the rules say that if one is having way too much fun, it is not a deductible expense.
First, any entertaining you do must be directly related to the active conduct of your business or associated with a directly related discussion that preceded or followed the meal or entertainment. In other words, if you take someone to lunch but do not discuss something directly related to business, but only talk about the season finale of your favorite show and how surprising you both found it, the meal is not going to be tax deductible.
This goes for entertainment and events, too. No matter if the goal of your party or event is to build goodwill, to deduct the cost of the party, you must conduct business before, during, or after the party. That means you need to include a product demonstration, a reveal of a new product or service, a sales pitch, or an educational talk related to your product or service.
Aside from throwing parties or taking clients out for meals, other common expenses to consider include:
1. Meals provided to employees during business hours for your convenience, usually to keep them there working during a crisis or busy time of day, are 100% tax deductible. Track these costs separately, under a category called "crew meals." This way, at tax time, your tax pro will not inadvertently apply the 50% rule.
2. Do not try to deduct repeated lunches with business associates where one time it is your turn to pick up the tab and the next is theirs.
3. While you can write off the cost of a hotel suite during a trade show, doing so year-round and marking it an entertainment expense is not permissible. Similarly, do not try writing off the cost of entertainment facilities, including mortgage interest, property taxes, depreciation, and rent for swimming pools, bowling alleys, tennis courts, cars, homes in a vacation resort or boats.
4. You may not deduct dues paid to golf and athletic clubs, country clubs, hotel clubs, or even clubs that provide meals while participating in business discussions.
During any deductible activity, the environment must be conducive to conducting business. For example, a rock concert is not going to be a good location to conduct business, given that the volume would not be conducive to conversation. However, if if the business discussion had taken place prior to the concert or shortly afterward, it may have been allowed..
Also, if you are trying to write off an expense, consider carefully who is (or will be) in attendance. You may deduct 100% of your cost if the party is either open to the general public or if it is for employees and their spouses. On the other hand, if the party is for clients, potential clients and independent contractors who work with you, then you may only deduct 50% of the cost. If there is a mix of employees and spouses along with clients and potential clients, you may allocate part of the cost as a 100% write-off and the remainder as a 50% write-off based on the number of guests in each category.
Another Internal Revenue Service rule says entertainment cannot be "lavish or extravagant." Although subjective and a gray area that can be argued, the best option is to keep things simple. Make sure the entertainment or meal is aligned to your company's budget. If your bottom line is zero, you likely will not be allowed to write-off first-class accommodations for potential clients in town for your party.
In any event, it is important when planning to write off expenses to keep all receipts for all expenses incurred. For expenses that cost less than $75, however, a journal entry in your appointment book with the amount, location, and names of those you entertained is sufficient. If you have questions, you should contact either an accountant or a qualified tax law attorney to advise you as to what is deductible and what is not, and to assist you in the event of an audit or tax court proceedings.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.