One of the biggest perks of being a small business owner is the ability to turn a large portion of your meals and entertainment expenses into tax deductions. With proper planning and documentation, you are able to turn several of your meal and entertainment expenses into a business expense. When it comes to Valentines Day and taking your special someone out on the town, the bad news is, no, you cannot deduct the meal.
Your spouse does not count as a meal and entertainment deduction- Even if your spouse is your business partner or even one of your clients, the IRS will not let you include him or her as part of your meals and entertainment expenses.
Here are some other good rules to remember on meal and entertainment deductions:
The deduction is limited to 50 percent of the total cost- Except in rare exceptions, the amount you are allowed to deduct for meals and entertainment expenses is 50 percent of the total bill.
You must be present to take the deduction- In order to qualify as a business meal or entertainment expense, you must be present in the meal or entertainment. This may seem like common sense, but I have seen many people buy sports tickets or something similar for a client and try to write it off as an entertainment expense. In that case, it would be considered a “gift expense” and limited to a $25 deduction.
Meals must take place in a location conducive to doing business- Typically this means a restaurant or home setting. Ordering appetizers at a nightclub will most likely not meet this requirement. Same with ordering a sandwich from the cart girl while playing golf.
Entertainment must follow a business discussion- The nightclub or golf course expenses described in number four may still be deducted as entertainment expenses, but only if they follow a business discussion at a proper location. So if you are going to play 18 holes with a client, make sure to take them to lunch and discuss business first.
Sales presentations and seminars may be eligible for 100 percent deduction- If you are hosting a presentation or seminar to market your product or services, you may be allowed to deduct 100 percent of the cost of meals and entertainment involved. A good example of this is the network marketing business, where people often invite friends and potential clients over for a brief presentation of their business. In this case any food or entertainment expenses they had would be 100 percent deductible instead of the normal 50 percent.
Properly record the expenses- As with all tax deductions, documentation is the key. The IRS is pretty loose with receipts in this area, only requiring you to save them if the total cost is over $75. But you still have to have extensive record keeping with each transaction.
Typically the IRS wants you to record: Who was entertained (the person or people you spent the money on), where did it take place (location of meal or entertainment), when did it take place (date is sufficient here), why did it take place (what business did you discuss) and how much did it cost (price).
Turning a portion of your meal and entertainment expenses into business expenses can save you a significant amount of money on your taxes. By remembering these seven rules and using a little strategic thinking, you can maximize the amount of meals and entertainment that qualify for the deduction.