Business Meals and Entertainment
The requirements for deducting business meals and entertainment expenses
requires you to jump through several extra hoops to qualify as deductible and is subject
to limitations. Nevertheless, if you pay careful attention to rules outlined below, the
expenses should qualify as deductible.
(1) Ordinary and necessary business expenses. All business expenses must meet the general
deductibility requirement of being “ordinary and necessary” in carrying on the
business. These terms have been fairly broadly defined to mean customary or usual, and
appropriate or helpful. Thus, if it is reasonable in your business to entertain clients or
other business people you should be able to pass this general test.
(2) “Directly related” or “associated with.” A second level of tests specially
applicable to meals and entertainment expenses must also be satisfied. Under them, the
business meal or entertainment must be either “directly related to” or “associated
with” the business.
“Directly related” means involving an “active” discussion aimed at getting
“immediate” revenue. Thus, a specific, concrete business benefit is expected to be
derived, not just general goodwill from making a client or associate view you favorably.
And the principal purpose for the event must be business. Also, you must have engaged
actively during the event, via a meeting, discussion, etc.
The directly related test can also be met if the meal or entertainment takes place in a
clear business setting directly furthering your business, i.e., where there is no
meaningful personal or social relationship between you and the others involved. Meetings
or discussions that take place at sporting events, night clubs, or cocktail
parties—essentially social events—would not meet this test.
If the “directly related” test cannot be met, the expense may qualify as “associated
with” the active conduct of business if the meal or entertainment event precedes or
follows (i.e., takes place on the same day as) a substantial and bona fide business
This test is easier to satisfy. “Goodwill” type of entertainment at shows, sporting
events, night clubs, etc. can qualify. The event will be considered associated with the
active conduct of the business if its purpose is to get new business or encourage the
continuation of a business relationship. For meals, you (or an employee of yours) must be
present. That is, for example, if you simply cover the cost of a client's meal after a
business meeting but don't join him at it, the expense does not qualify.
(3) Substantiation. Almost as important as qualifying for the deduction are the
requirements for proving that it qualifies. The use of reasonable estimates is not
sufficient to stand up to IRS challenge. You must be able to establish the amount spent,
the time and place, the business purpose, and the business relationship of the individuals
involved. Obviously, you must set up careful and detailed record-keeping procedures to
keep track of each business meal and entertainment event and to justify its business
connection. For expenses of $75 or more, documentary proof (receipt, etc.) is required.
(4) Deduction limitations. Several additional limitations apply. First expenses that are
“lavish or extravagant” are not deductible. This is generally a “reasonableness”
test and does not impose any fixed limits on the cost of meals or entertainment events.
Expenses incurred at first class restaurants or clubs can qualify as deductible.
More importantly, however, once the expenditure qualifies, it is only 50% deductible.
Obviously, this rule severely reduces the tax benefit of business meals and entertainment.
If you spend about $50 a week on qualifying business meals, or $2,500 for the year, your
deduction will only be $1,250, for tax savings of around $300 to $400.