Meals and Entertainment: What’s Deductible, and What Isn’t.
Just because there is a line item for meals and entertainment, certainly does not mean every dinner or theater ticket is a valid deduction. Although there is a range of expenses that could fall under this category, there are a few rules when it comes to the IRS seeing these as business, or play.
First of all, any entertaining must be directly related to the conduct of your business. If we go to lunch and talk about your children, but not tax planning strategies, sale projections, or goals, then technically we shouldn’t write off the lunch.
This also pertains to throwing parties. Even if you are doing it to build goodwill, you must include business before, during, or after the event. Try throwing in a product demonstration, reveal a new service, and give a sale pitch or educational talk.
The environment is another factor to be considered. While you may have had a meeting at the local bar that led to great business discussions, the IRS is more likely to investigate weekly bar visits being written off than a meeting at a café.
The IRS isn’t too fond of entertainment being too extravagant either. Long story short, keep it simple. Make sure meals and entertainment expenses align with your company’s budget. While you do want to impress those clients that came to town for your party by buying them first-class accommodations, it’s probably best that you don’t splurge expecting an easy write off.
Lastly, be prepared. If the IRS ever wants to question you, be sure you are prepared to defend all the deductions you take. Make party invitations clearly announce a business purpose, take pictures of guests investigating new products or viewing educational videos, and throw a business card raffle or have attendees sign a guest list.
Our last piece of advice? You guessed it. Keep all receipts related to these expenses and don’t be afraid to take notes on them to have all your bases covered.
Here a few other entertainment expenses to consider:
- If you provide meals during business hours to keep employees working during a busy time, it is 100% deductible! Keep these expenses under a category separate from client meals, as client meals fall under the 50% rule.
- You cannot deduct athletic clubs, country clubs, hotel clubs, or other clubs that provide meals.
- Writing off a hotel suite during a trade show is okay, but doing this year round is a red flag. It’s sure to raise a few brows if you are trying to write off the cost of entertainment facilities such as mortgage interest, property taxes, rent for pools, bowling alleys, tennis courts, homes, cares, or boats.
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