When is That Meal Tax Deductible?

BurgerAndFries When is That Meal Tax Deductible?There’s a lot of confusion among taxpayers about what meal and entertainment expenses they can legitimately deduct as business expenses on their tax returns. Professional tax preparers aren’t in complete agreement on the subject either. Not too surprising, considering the length and complexity of the Internal Revenue Code.

As I said in an earlier article, in order to deduct any expense as a business deduction, it has to be ordinary, necessary, and reasonable based on the facts and circumstances. Because the deductibility of business expenses is one of the 10 most litigated tax issues, you should discuss your individual situation with your CPA or tax pro.

That said, I’ll explain the regulations as I understand them for

  • unreimbursed expenses that are incurred
  • in your local area

(Expenses that you have when you’re away from home overnight might qualify as travel expenses)

Contrary to popular opinion, there is NOT a separate category for in town meal expenses. Local meals might be deductible as entertainment expenses if you entertain a

  • client
  • customer or
  • employee

and the expenses are

  • directly related or
  • associated

with your business. You or one of your employees must be present.

Directly related means that the entertainment took place in a business setting or the main purpose of the entertainment was the active conduct of business.

AND

You did engage in business during the entertainment and you had more than a general expectation of getting income or some specific business benefit.

You don’t have to spend more time conducting business than you do on the entertainment, but if the business discussion is only incidental to the entertainment, the expenses will not be considered directly related.

What that means is that you can’t treat a friend, colleague, or spouse to dinner and expect that all they have to do is ask you “how’s business? ” in order to take the cost of the meal as a deductible business entertainment expense.

What about paying for lunch for your employees on a normal work day?

For the meal to be deductible, you’d have to prove that the main purpose of the meal was conducting business, you actually did conduct business, and you had more than a general expectation of some specific future business benefit.  Then the meal would qualify as directly related. If that weren’t the case, you’d have to prove that the meal occurred directly before or after a substantial business discussion.

If you take one of your workers to a local restaurant because it’s convenient that day and you feel generous, but all you talk about while you eat your burgers is the awful officiating at last night’s game…sorry, that won’t be deductible.

Meetings or discussions at

  • nightclubs
  • theaters
  • sporting events and
  • cocktail parties

are generally considered to have substantial distractions that prevent you from actively conducting business, so they won’t meet the directly related test.  The same is true for meetings with people who aren’t business associates which are held at

  • cocktail lounges
  • country clubs
  • golf clubs
  • athletic clubs or
  • vacation resorts

Expenses that don’t meet the directly related test could meet the associated with business test if the entertainment had a clear business purpose (for example to get new business or to encourage the continuation of an existing business relationship) and was directly before or after a substantial business discussion.

You can’t deduct the cost of meals for your spouse or the spouse of client unless you can show they had a clear business purpose.

Meal expenses include the costs of food, beverage, tax, and tip.  The amount you can deduct is 50%.

To prove your expenses, keep the proof in an account book, diary, log, trip sheet, expense statement or similar written record. Proof should include receipts, bills, and cancelled checks.

You must be able to show the

  • amount
  • date
  • place
  • purpose of the expense
  • nature of the discussion and
  • relationship of the people attending

Scott asked if he could deduct the costs of attending a business networking event.  I’d say that if there’s an admission price to the event it’s deductible as a meeting expense (and mileage to and from would be deductible as well).  Whether or not meal expenses would qualify as entertainment expenses would depend on the particular circumstances as described above.

Scott also wanted to know if he could deduct the costs of drinks at a networking cocktail party.  I think that would be unlikely to meet the requirements, but without knowing the specific details of his business and the actual event, I can’t say for certain.  Scott will have to discuss this with his CPA or tax preparer who knows the details of his circumstances.

As you can see, this is quite a complicated area.  Since the IRS considers the facts and circumstances of each individual situation, it’s important for you to get help from a professional who knows your particular story.

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