A few words of caution regarding entertainment expenses

It’s…The Holidays!  Many people – including business owners – entertain around the holidays.  They throw big parties at home.  They host big dinners in restaurants.  The difference between “people” and “business owners” is that business owners try to take a tax deduction for these entertaining expenses.  The IRS knows this, and has developed a pretty cut-and-dried response.

Essentially, if your guest list includes other business people, your entertainment expenses may be deductible on a pro rata basis.  In English, this means you need to add up the total expenses for the party, divide by the total number of guests in attendance, and then multiply by the number of business people in attendance.

How and when to take a meal expense when you are an employee

Employees sometimes have business expenses. Typically, these are union dues, uniforms, education, and professional licensing, education, and insurance. It is rare for an employee to entertain clients without being reimbursed by the employer, but it is possible.

It is more likely for an employee to incur a meal expense while traveling for business. In this scenario, there is usually a reimbursement, but the reimbursement does not cover the full cost. Like the items listed above, any expense that is not reimbursed is a possible tax deduction. But that does not mean anything you eat or drink while at the seminar in New Orleans is business related! Those cute little bottles on the flight and in the mini-bar of your hotel room are not meals and do not count. A mid-afternoon ice cream, candy bars from the hotel store, and espresso in the lounge are also not meals. Meals are breakfast, lunch, and dinner. Skip breakfast and go drinking after class? Don’t try it: your documentation will out you.

What about eating at your desk?

In a word:  NO!

Remember that pb&j that you slapped together at home this morning and then stashed in your bottom drawer?  You don’t get to take that as a business expense, so why would anyone think it counts if you have a deli sandwich delivered in the middle of the day?

Well, actually there is a precedent.  Let’s say there’s a big project, and the boss is worried about the deadline.  The boss just might spring for Chinese to encourage the team to stay late.  This counts!  Check it out –

Common pitfalls in the area of Meals & Entertainment

No meal was ever enjoyed more than the meal you wrote off as a tax deduction.  But was it legit?

In my experience, this is one of the most abused deductions available to the small business owner.  All too often, the small business owner considers every activity a business deduction from the first step outside the home in the morning until returning to the home in the evening.  When the business owner meets a business buddy in a coffee shop, and they each buy a sandwich and eat together companionably, they each believe they’ve just had a deductible business meal.   If the business owner is on a trip, every cup of coffee, and even the tiny little airplane cocktail get tallied up for a meal reimbursement.  Sadly, none of these are valid deductions as Meals & Entertainment.

How to properly document your meal expense

What a great lunch! You just convinced Gidget (of Gidget’s Widgets) not only to carry your patented micro-widget, but also to devote an entire edition of The Wonders of Widgets magazine to the marvels of micro-widgets. You smile broadly as you sign the credit card receipt, tuck a $7 cash tip under the water glass, and (making small talk about the frightful weather) walk with Gidget out to your respective cars.

Stop! Let’s rewind a bit, because if we don’t, you aren’t going to be able to support the meal expense. Sure, it definitely had an acceptable business purpose, and for $44.44, the meal was certainly reasonable – not too fancy, not too plain. But you’re still forgetting a few things.

First in a short series on the Meal Expense

A good old turkey club…

a crock of French onion soup…

and anything alfredo…

Everybody likes to eat, and getting to take a meal as a tax deduction only makes it sweeter.