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You and your family will probably be doing more entertaining. And, as the
holidays approach, you'll want to know how to make the most of holiday entertainment expenses.
Today we'll review
the rules for deducting business meals and entertainment so that you can capture these expenses for your tax return.
Meals
and entertainment you and your family host in the course of your business are deductible if they're directly related to the
active conduct of your business or they take place directly before or after a substantial, bona fide discussion
directly related to the active conduct of your business. That means, clients, customers, or patients; prospective clients,
customers or patients; referral sources; and other business relationships (vendors, professional colleagues, etc.).
The
general rule is that you can deduct 50% of most meals. Specific deductions include meals, drinks, taxes and tips.
Now for the fine print:
- Surroundings must be conducive to business discussion. (I think this rule
eliminates the “monster truck crush’em extravaganza” as a location for a business meeting!)
- To prove your deductions, you'll need a diary, day planner, or similar log
to verify your deduction. IRS Publication 463 directs you to record the cost of the meal, date of the meal, establishment
where the meal takes place, the business purpose for the expense (or business benefit you gain or expect to gain from the
meal), and your business relationship with your guest.
- You'll need receipts for expenses over $75. (Many people mistakenly think
they have to keep receipts for expenses over $25.) Credit card statements work if you corroborate them by recording the business
purpose of the expense in your business diary.
- You can't deduct meals with your spouse unless you're traveling together
for business. However, you can include the cost of a spouse or other "closely connected" person (such as children or parents)
if your guest brings their spouse.
- Don't forget the cost of entertaining at home! You can deduct costs for
small gatherings at your home under the same rules that apply when you go out to eat. If you invite more than 12 guests, you
can deduct "reasonable" costs if your primary purpose is business. To show compliance, include employees; let guests know
your business purpose; discuss and display your product or service at the event.
Really, why celebrate something as
trivial as a birthday, bat mitzvah, or wedding anniversary when you can celebrate 10 years in business, or 15 years at the
same location? Just take it from Rick Moranis, playing nebbishy accountant Louis Tully in Ghostbusters:
"Hey, everybody,
this is real smoked salmon from Nova Scotia, $24.95 a pound! Only cost me $14.12 after tax, though . . . . that's why I invited
clients, instead of friends."
- Expenses for sporting and theatrical events, golf and boating outings, and
similar entertainment are also 50% deductible if they take place directly before or after a substantial, bona fide discussion
directly related to the active conduct of your business (so that “monster truck crush’em extravaganza” can
be deducted after all!). Deductions include the face value of tickets (but not a scalper's premium) to sporting and theatrical
events, food and beverages, travel and parking expenses, taxes, and tips.
You can deduct a full 100% of the expenses listed below:
- Meals and entertainment for sales seminars and similar events where the
meal is integral to the presentation.
- Costs for sporting events you organize to benefit charity.
- Recreation expenses for your employees.
- "Convenience" meals you furnish your employees (and yourself, unless you're
taxed as a proprietor) for the convenience of the business and not for compensation (including meals you furnish on-premises
to let employees stay available for emergency calls, meals you furnish during short lunch periods up to 45 minutes, meals
you furnish where there aren't adequate eating places near the workplace, and any meals you furnish to over 50% of employees).
- Off-premises meals you provide as part of required business meetings
Meal and entertainment expenses are easy to overlook -- especially when it comes to
entertaining at home. But over time, those little expenses add up. Don't lose out on those easy savings!
Adapted and used with permission
from Ed Lyon & Keith VandeStadt of TaxCoach Software LLC (www.taxcoachsoftware.com), (513) 321-2820, 2619 Erie Avenue #2D, Cincinnati, OH, 45208 US.
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