Meals and Entertainment: How to Classify Business Expenses for Tax Purposes
By Louann Cassano
Whether it’s drinks with a client or dinner during a work trip, meals and entertainment are generally tax-deductible business expenses. However, the size of the allowable write-off depends on the circumstances of the expenditure, including the purpose of the meal or entertainment, who the recipient is and where the expense takes place.
If you don’t understand the IRS rules that govern these deductions, you may be tempted to lump all meals and entertainment into one category. However, doing so can prove costly come tax time, either by denying your business its rightful maximum deduction or by catching the attention of the IRS.
Here are some tips for ensuring that meals and entertainment are properly classified to keep your business in compliance and ensure it receives the full tax break it is entitled to.
Understand the rules
For tax purposes, meals and entertainment fall into two basic categories — those that are 50 percent deductible, and those that are eligible for a 100 percent deduction. In general, meals and entertainment that double as compensation or fringe benefits for a large group of employees qualify for the 100 percent deduction. Examples include company holiday parties, employee-focused social activities and food and drink provided for workers as a benefit or as an incentive to work extra hours. Public events intended as goodwill or advertising, and transportation to and from business meals or entertainment activities, are also 100 percent deductible. However, keep in mind that although meals and entertainment costs incurred during the normal course of business are 100 percent deductible on your business financials, they may not be 100 percent deductible on your business tax return.
Expenses that fall into the 50 percent category tend to be more individual in nature, such as business travel meals, client meetings and events, and business meetings for employees, stockholders and executives.
Save time — and frustration — by properly categorizing meals and entertainment expenses as they’re incurred. Educate employees who submit expense reports about the classification rules so they record them correctly throughout the year, easing the burden of sifting through months’ worth of meals and entertainment receipts retroactively come tax time.
Use common sense
The bigger the expense, the more significant the deduction to your bottom line, so make sure that big-ticket items such as holiday parties and company picnics are properly logged in the 100 percent deductible category. But don’t get greedy, as huge meals and entertainment deductions will raise a red flag for auditors, so make sure everything is properly documented.
By following these simple steps, you can maximize your business deductions and remain in compliance with IRS regulations.
Publication 535, Internal Revenue Service