A lot of business gets done outside of the office — over lunch, on the golf course, etc. The tax law allows deductions for business meal and entertainment expenses only if specific requirements are met. Even then, deductions are generally limited to 50% of the cost.
Meal and entertainment expenses can qualify for the 50% tax deduction if they are directly related to business. Example: You have a dinner meeting with your customer to discuss the schedule for a new project. Because the purpose of the meeting is to talk about the project — a revenue generating activity for your firm — the meal is directly related to your business.
What if you don’t “talk business” while you are entertaining a customer, client, or prospect? The expense may still qualify for a deduction if a substantial, bona fide business discussion takes place before or after (on the same day as) the meal or entertainment activity. Example: You and your client meet at your office to discuss a business matter. Afterward, you treat the client to lunch and a ball game. In this case, 50% of your expenses are potentially deductible because they are associated with the active conduct of your business.
To support your deduction, you should have records of the time, place, and business purpose of the activity; who attended and their business relationship; and the amount spent.
When the 50% Limit Does Not Apply
In some cases, meal and entertainment expenses are fully deductible. Expenses that may qualify for a 100% deduction include:
- The cost of occasional recreational and social activities primarily for the benefit of non-highly compensated employees, such as an annual summer picnic
- Amounts treated as employee compensation (for example, the cost of an all-expenses-paid vacation for your company’s top-grossing salesperson)
- Amounts paid for tickets to charitable sporting events, such as a golf fundraiser
Taxpayers must meet various requirements to qualify for these deductions.