Charles Jenkins Jr, CPA walks through what you need to know when asking yourself, Can I write off meals when we talk about business? Don't feel like watching? Read on below!
Deciphering what the IRS considers a tax-deductible business expense can be tricky. The answer isn’t always black and white, and there are exceptions to consider. In the eyes of the IRS, the expense must be ordinary and necessary for the business in order to generate a tax deduction. In this post we will look at the unique credentials that help us make the call for meals, entertainment, and a few exceptions in between.
The key factors to address when determining the tax-deductibility of meals are frequency and intent.
Frequency: everyone needs to eat lunch every day. Lunches with co-workers can’t be written off, even if business is discussed, if they happen two or three times per week. This is simply too frequent in the eyes of the IRS.
Intent: if lunch is planned to allow an opportunity to catch up with a colleague or connection, this meal will not generate a tax deduction even if business is discussed. This is because the primary intent of the meal was not directly business-related.
Further, when wining and dining, keep in mind that the IRS states that “extravagant” meals are not tax-deductible. The IRS doesn’t give many details on what they view as extravagant, so we encourage everyone to use their best judgement.
What does generate a tax deduction is if the expense is specifically for the benefit of the business. Lunches with referral partners, clients, or a mentee within the staff would all be classified as meals that help to push the business forward.
For the meals that qualify to be written off, the IRS guideline specifies that 50% of the expense (which includes food, tax, and tip) can be deductible.
Tip: Remember to keep consistent and accurate records! Save receipts or generate electronic copies that clearly show where and when each meal took place, who was there, and what was discussed. This is important so that you can back up the business purpose behind any deduction if questioned by the IRS.
Recent tax law changes have made a big impact on the topic of entertainment business expenses. Previously, like meals, 50% of these expenses could be tax-deductible. Now however, entertainment expenses are considered personal, and 100% non-deductible.
These expenses include (but are not limited to) things like:
Sporting event tickets
Country club dues
Hunting or fishing trips
This recent adjustment seems like a big shift, but note there are many exceptions that can come into play.
Like everything with the IRS, there are exceptions. Here are a couple of the most common business expense deduction exceptions to be aware of.
1. When visiting entertainment venues, if there are separately stated meals at the event with separate costs, the meals can be 50% deductible while the cost for the entertainment venue will remain 100% non-deductible.
2. If you have expenses in the entertainment category that are for the benefit of employees – all employees or an entire department – those costs are 100% deductible from your taxes. These types of costs can include:
Again, keep in mind that these events cannot be geared toward highly compensated employees or outside business connections. The intent behind this exception is that the cost must be for the benefit of the employees as a whole.
As previously noted, there is extensive grey area in this topic and too many individual scenarios to cover in one post. You can always reference the IRS website for more information, or you can reach out to us at DBA for additional guidance. We would welcome the opportunity to assign a team of three fractional financial experts to your small business to help you navigate tax deductions and other business topics.
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