Understanding what business expenses are deductible can make a significant difference during tax season. Business meals and entertainment are two common categories that require careful navigation due to recent changes to the IRS rules over the years.
The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated deductions for most business-related entertainment expenses. For example, owners can’t deduct any costs related to of taking clients out for a round of golf or to a football game. However, you can still generally deduct 50% of the cost of food and beverages when they’re business-related or consumed during business-related entertainment.
Here’s a comprehensive guide to when and how you can deduct these expenses.
Business Meals
Business meals are deductible if they meet certain conditions outlined by the IRS. Meals include food and beverages consumed during business discussions or while conducting business activities. For most business meals, you can deduct 50% of the cost.
Key Requirements for Deducting Business Meals:
1. Directly Related or Associated with Business:
The meal must be directly related to the active conduct of your trade or business, or
It must occur in a setting conducive to a business discussion.
2. No Lavish Expenses:
The cost of the meal cannot be extravagant or lavish under the circumstances.
3. Documentation:
You must keep records of the meal’s purpose, attendees, date, location, and the amount spent.
Entertainment Expenses
In the past, entertainment expenses were deductible under certain conditions. However, the TCJA eliminated most deductions for entertainment, amusement, or recreation activities. That said, there are still scenarios where expenses with entertainment components can qualify for deductions.
When Entertainment Expenses May Be Deductible:
1. Entertainment as a Part of a Meal:
If food and beverages are purchased separately from the entertainment or are listed on a separate receipt, they may qualify for the standard meal deduction.
2. Directly Related to Employee Benefits:
Costs for recreational or entertainment events for employees, such as holiday parties or company picnics, remain 100% deductible.
3. Marketing and Advertising:
Entertainment expenses used as part of a promotional campaign or to advertise your business may be deductible if they are directly tied to the business's activities.
Best Practices for Documentation
The IRS places a strong emphasis on detailed records for meal and entertainment deductions. To ensure compliance:
Save Receipts: Include itemized receipts showing the date, location, and total amount.
Track Attendees and Purpose: Maintain notes on who attended and the business purpose of the expense.
Use Technology: Consider using expense-tracking software to organize and categorize your spending.
Key Takeaways
Business meals are typically 50% deductible, provided they meet IRS criteria.
Entertainment expenses are generally non-deductible, with exceptions for employee events and promotional activities.
Accurate and thorough record-keeping is essential for substantiating your deductions.
Consulting with your VAAS tax professional can help ensure you maximize your deductions while adhering to IRS rules. By staying informed, you can optimize your tax strategy and keep your business finances in order.