Kostecke CPA

Travel and Entertainment Part 1: What Meals are Tax Deductible?

what can i deduct from my taxesWhat meals are tax deductible business expenses? For most types of businesses and circumstances, the deduction is equal to half the cost when the purpose is clearly for business.

What is a valid business purpose?

Here are some examples:

  • Traveling primarily for business purposes
  • Attending business-related education (training, seminars, etc.)
  • Attending a business-related convention or conference
  • Recruiting employees
  • Entertaining customers or clients

You also need documentation to support the cost and the business purpose of the meal.

Receipts are required for any amount over $25. Documentation of the business purpose of the meal is always required for the tax deduction. Documentation must include the date, the location, the people you entertained, the business discussion that took place (if you are with business associates or clients) and the amount. The meal expense cannot be considered extravagant or unreasonably high. This definition is judgmental and depends at least partially on the industry and the location.

Four Examples to Illustrate the Requirements for Meal Deductions

Example 1:

Lee needed to obtain continuing professional education credits for her license. A seminar she was interested in was offered in Atlanta, where her daughter lives.  She registered for the two-day seminar in Atlanta and  stayed a full week visiting her daughter. Lee was able to deduct meals, hotel and rental car expenses on the days of the seminar, but not every day of the trip, because she was there on the other days for personal reasons. Airfare to and from Atlanta would probably not be allowed as a deduction because the trip was 7 days long and only 2 days were business-related.

If Atlanta was the only place she could go for this seminar or it was the most economical alternative because she stayed with her daughter instead of at the hotel, you could argue that the airfare should be a valid business deduction. Lee would have to document the reason for attending the seminar, the reason for deducting anything that would be in the gray area, such as airfare, and keep copies of hotel, transportation, and meal receipts $25 and over, to support this deduction.

Example 2:

The prior example illustrates what you can deduct when you’re mixing business and pleasure in one trip. Here’s another example, showing when lunches with a customer can and cannot be deducted. Frank has a customer who is also a close friend. They enjoy going out together with their spouses and have even vacationed together. Frank takes this customer to lunch every week. Frank always asks “How’s business?”  during the course of lunch to ensure that he can deduct the lunch. However, the discussion is rarely about business, focusing more on personal topics.

Technically, Frank could probably get away with deducting some of these expenses as long as he documented the business topic discussed and saved receipts to support the cost. However, these expenses sound more personal than business-related. Certainly the spirit of the rules is not being followed in this example. Fifty lunches with the same customer and the same topic of  “general business discussion” would probably not fly unless there was an ongoing project or something that made frequent contact necessary. A few lunches a year with a good customer is reasonable, but when it happens at an unreasonably high frequency, it doesn’t seem like a business expense.

Example 3:

This example explores the reasonable cost concept in meal deductions. Glinda sells high-end real estate for a living in Los Angeles. She just closed a deal on a $4.9 million house in the Hollywood Hills originally built by the lead guitarist for a popular rock band from the 1980s. The buyers are a supporting actor in a successful sitcom and her husband.

To celebrate, Glinda takes the buyers out to an expensive dinner (more than $1,000), including two rare vintage bottles of wine that were half the bill. Glinda can deduct this meal as long as she has it properly documented. The nature of the business she’s in, and the revenue ($180,000 or more) generated in relationship to the cost of this dinner are reasonable and would not be considered overly extravagant. If Glinda was a real estate agent in Lincoln, Nebraska instead of Los Angeles, and she just sold a house for $150,000 and had the same type of dinner (provided you could spend that much on dinner in Lincoln), it would probably not pass the  test for a reasonable business expense.

Example 4:

This last example warns about a practice that results in a disallowed meal deduction. Wes likes to go to lunch with a few of his friends who provide services for his business and referrals  between businesses. They go to lunch once or twice a month and take turns paying for the whole table. Per IRS Publication 463, when business associates take turns paying for lunch, dinner, drinks, etc., the expenses are not deductible as business expenses. They are considered personal expenses.

This rule seems a little bit arbitrary because it assumes that if you take turns paying you’re not having a valid business discussion.  Just like my mom questioned whether I was really going on a date if we went halvsies on the cost of dinner. It is important to know this rule, however, and perhaps change your practices accordingly. The rules for meal deductions are not precise. You have to understand the rules and use your judgment to determine whether or not a business meal expense really has a business purpose and is deductible. Remember to keep your receipts and document, document, document!

Read more on this topic

Search for Pub. 463 at irs.gov under IRS Forms and Publications.

 
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