One of the more confusing deduction topics is for meals and entertainment. As you’ll see in this article, meals and entertainment deductibility can be 0%, 50%, or 100%. The key is knowing the conditions under which the spending is made. Meals and entertainment are also one of the few areas of the tax code where specific documentation requirements are written into the tax code itself; no documentation, no deduction!
General Rules for Meals and Entertainment with Clients or Customers
To be deductible at all, meals and/or entertainment with clients or customers must be both directly related and associated with business. Directly related means:
1. That the main purpose was active conduct of business
2. Business was actually conducted
3. And there was more than a general expectation of business income or benefit at some future time
There is no “bright line” test when it’s just a business owner or employees with clients at a restaurant or entertainment event and judgement is required. However, hunting and fishing trips are generally not considered deductible.
But there is a flip side of this matter. If the meals and entertainment occur in a “clear business setting” such as a convention or similar situation where such a gathering could not reasonably be personal only, then there is a presumption of being deductible.
To be associated means there:
1. Was a clear business purpose and there was a substantial business discussion
2. Meals and/or entertainment occurred directly before or after the discussion.
The business purpose test requires judgment and is based on the relatedness of the discussion, not necessarily how long it was. Meals and/or entertainment can occur the following day if there is travel involved.
If meals and entertainment expenses are directly related and associated with business (as described above), they are 50% deductible.
What is not deductible? The costs to rent, own, or lease entertainment facilities are not deductible, as well as skyboxes at sports venues (but the face value of the tickets are).
Meals and/or entertainment expenses with clients or customers cannot be lavish or extravagant. There is no bright line, but judgement is required. Also, if personal expenses are mixed with business, a reasonable allocation must be made. Taking turns picking up a bill for colleagues for personal reasons are not deductible – there must be a business purpose.
Meals for Employees
Meals for employees are 100% deductible in the following circumstances:
- They are for the employer convenience. This means that the food is provided to facilitate work done for the employer because of deadlines or because eating out/picking up food would take too long and would interfere significantly with work.
- De minimis, meaning snack foods, soft drinks.
- Occasional meals or meal money to enable overtime work.
- Occasional parties or picnics.
- Employer operates a cafeteria or facility on or near the business premises during, immediately before or after the employee’s work day.
- If employees have a choice of money or food, the cost is not deductible.
- A 2% or more shareholder in an S corporation is not an employee for the rules listed above.
Meals for employees while they are traveling on business if they are away from home substantially longer than an ordinary day’s work and they need sleep or rest to meet the demands of the work. In this case, they are 50% deductible.
For each meals and entertainment expense, the following must be documented:
- Business purpose (be specific but brief)
If family members are part of the business, only expenses for those who are relevant to the business being conducted is deductible.
Disclaimer: The information in this document is not tax advice and should not be relied upon to take a position on a tax return or for tax planning.