Meals and entertainment is one of the most misunderstood tax deductions. Some small business owners assume every meal they consume should be a deductible tax expense. Unfortunately, there are rules business owners must adhere to, to qualify for this deduction. This article discusses some of the factors you should consider. Like any other tax matter, personal situations may vary and it is best to consult with a tax advisor for more personalized advice.

You have to meet with someone else (except you are traveling)

Meals and entertainment could be a great marketing ploy to drum up new business. To qualify as a meals and entertainment expense you have to meet with someone other than you. You cannot eat breakfast at a restaurant on your way to the office and call that a valid business expense. Everyone has to eat whether or not they own a business and the cost of eating breakfast on your way to the office is a normal expense for most people and not a business tax deduction.

However, if you were traveling overnight to another city and stopped to eat lunch, the cost of that meal will be tax deductible (subject to the 50% limitation). The travel must be overnight. You cannot stay in a hotel across town and call this a travel expense.

The intend of the event must be for business

We have established that to qualify as a meals expense, you have to meet with someone. However, meeting with someone is not sufficient but there must be a valid business reason for the meeting. Dining with clients or employees does not constitute a valid business reason all by itself. You cannot meet with clients and spend the whole time talking about personal issues and then write off the meal as a business expense.

The environment must be conducive to business

Meeting clients at a night club to discuss business will not fly with the IRS. The noise level is too high to discuss any valid business issues.

The meal cannot be lavish or extravagant

What this means depends on facts and circumstances. What is lavish to one business might be an ordinary expense to another.

You cannot take turns to pay for meals

If you dine often with a particular client or employee on a regular basis and you take turns paying for the meals, then the meal expense is not considered valid.

Importance of documentation

Lack of documentation – could pose a serious problem in the case of an audit. The receipts must indicate the business purpose and whom you entertained. Entertaining clients is not a good enough reason. Good documentation will reduce the likelihood of the IRS denying your deductions thereby increasing your tax bill.

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