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.
For starters, the business owner is not sharing the meal with anyone else. This means the purpose of the meal is merely to slake the business owner’s hunger. Here in the USA, we pretty much accept that a person will eat 3 times each day. The business owner, like any other person, has the choice to start the day with a bowl of cereal at home or a bagel on the run, and to pack a pb&j or pick up a hoagie for lunch, and to return home to cook or send out for pizza while working late. The IRS would say these are lifestyle choices, not business deductions, and I tend to agree.
Problems also surround country clubs. Sure, a business owner might pick up some business from other members of the country club, but this does not make tax deductions out of meals eaten at the country club. Are you sitting down? The IRS specifically includes country clubs on their list of disqualified venues – along with cocktail parties, nightclubs, theatres, sporting events, golf clubs, and vacation resorts. The IRS believes these venues offer “substantial distractions” to the conduct of business.
Additionally, the presence of non-business people, such as the business owner’s spouse and family, (or the business contact’s spouse and family) could disqualify the deduction. Seriously.
What’s the rationale for all these rules? The IRS contends that in order for a meal to qualify as a business expense, it needs to have a business purpose. Consider this scenario: the business owner is enjoying a family meal in a public place, and another business owner is seated nearby. They exchange pleasantries, and possibly even make a plan to talk the next day about some particular project, but then they go back to their families. Even if the business owner rudely talks business with the family for the rest of the evening, the focus of the meal was the family and hence, it is not a business meal. To put this into perspective, exchange family-meal-in-public-place for any other personal errand. If the business owner is buying groceries and happens upon another business owner, and they talk shop for 10 minutes, the groceries do not become a business expense. If the business owner is at the local nursery and happens upon another business owner, and they talk shop for 10 minutes, the roses do not become a business expense. Why then, should the meal?
There are a host of additional considerations, and we can certainly talk about your particular situation at greater length. The information in this article is meant as information; it is not exhaustively complete, and it is not legal or tax advice.