Tax Deductions on Meal & Entertainment Expenses

Costs of business entertainment can be deducted if expenses are substantiated.

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A business owner or partner may have to wine, dine and entertain clients, customers, business contacts or other business associates. If the expense of business meals and entertainment isn’t reimbursed to you, the Internal Revenue Service allows you to deduct half the cost. But the expense must be properly substantiated to be deductible. The burden of proof is on you to show the expenses are legitimate.

Ordinary and Necessary

You can claim the ordinary and necessary expenses of business entertainment. You may deduct reasonable costs of entertaining business guests at places such as nightclubs, theaters, concerts or sporting events. But the IRS may question entertainment expenses that appear lavish or extravagant. You may include meals as part of the entertainment, such as refreshments at a sporting event. Or the meal may be the entertainment by itself. The deductible meals and entertainment may take place in your home city or while away from home at a convention, meeting or other business function.

Nature of Event

The nature of your business and the type of entertainment to which you treat your business guests can make the event a fully deductible business expense instead of a 50 percent deductible entertainment expense. For instance, if a clothing maker puts on a fashion show for clothing retailers, the event is a business expense and costs are 100 percent deductible. If a hardware distributor puts on a fashion show for its retailers, the event is entertainment and is only 50 percent deductible. You can’t claim an entertainment event as both a business expense and an entertainment expense. It must be one or the other.

Closely Related

The business meals and entertainment must be closely related to your business activities, and you must keep records to substantiate your expenses. If the entertainment takes place in a business setting such as your hospitality suite at a trade convention, or at another location where the main purpose is to conduct business, it can be claimed as closely related to your business. You can also claim meals or entertainment at other locations if the meal or entertainment immediately precedes or follows a substantial, bond fide business discussion.

Defend Deduction

Because many of the rules for deductible business entertainment are subject to interpretation, you need to be ready to defend the legitimacy of your business entertainment expenses. For instance, invitations to an event should announce the business purpose, such as previewing a new product or service. Have attendees sign a guest book with their name, company and title. That helps allocate expenses between business guests and any spouses or other family members who attend but are not deductible. Keep receipts for all expenses you plan to deduct.