Probably the most common business deductions are meals and
entertainment. However, people are often confused about
whether the expenses are fully deductible, partially
deductible or not deductible at all.
50% Deductible
The general rule for deducting meals and entertainment
expense is that 50% of the cost is deductible provided the
following requirements are met.
Requirement #1
The expense has to be ordinary and necessary in the trade,
business, or profession. In other words, it must be
commonly accepted to have this expense and it must be
appropriate in the trade or business. For example,
business owners routinely have lunch with prospective
clients to discuss business with the goal of attracting
additional business. This is a common and necessary
business expense.
Requirement #2
The expense must be directly related or associated to the
active conduct of your business. To meet this requirement,
you must engage in a business conversation during, before,
or after the entertainment. If the business discussion is
only incidental to the entertainment, the entertainment
expenses do not qualify.
The 50% limit applies to business meals or entertainment
expenses you have while traveling away from home on
business, entertaining customers at your place of business,
a restaurant, or other location, or attending a business
convention or reception, business meeting, or business
luncheon at a club.
100% Deductible
As with every general rule, there are exceptions. The
following exceptions result in the meal or entertainment
expense being fully deductible.
Exception #1
The expense is fully deductible when providing meals,
entertainment, or recreational facilities to the general
public as a means of advertising or promoting goodwill in
the community.
Exception #2
If the meal is provided to employees as a convenience to
the employer on the business premises and is furnished to
more than half of the employees, then the expense is fully
deductible.
Exception #3
A company holiday party expense is an exception to the
general rule and is fully deductible.
Non-Deductible Expenses
Items that are not deductible include membership in any
club organized for business, pleasure, recreation, or other
social purposes. The purposes and activities of a club,
not its name, will determine whether or not you can deduct
the dues. You cannot deduct dues paid to country clubs,
golf clubs, airline clubs, hotel clubs, or clubs operated
to provide meals under circumstances that might otherwise
be considered to be conducive to business discussions.
To ensure that your qualified meal and entertainment
expenses are deductible, you will need to have excellent
documentation. Please contact your Tax Coach for more
specifics about which documentation is required for meals
and entertainment.
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Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on these strategies, Tom is an adjunct professor
in the Masters of Tax program at Arizona State University.
For more information please visit
http://www.provisionwealth.com
