Can I Deduct That? Meals & Entertainment

Welcome to the third installment of Timber's #canIdeductthat series aimed at helping small business owners with their taxes. ICYMI, catch up on Auto Expenses and Mileage or Home Office Deductions.

 

 
Business Meals & Entertainment
 

As a freelancer, you probably have meals with business associates or clients and likely spend money on meals while traveling.You are entitled to a business deduction for meals directly related to your business or associated in any aspect to conducting business while on travel if they are ordinary and necessary.  According to IRS publication 463, “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense doesn’t have to be required to be considered necessary.”

Requirements to Deduct

The two tests to know if a business meal is deductible are "Directly Related" and "Associated". This means the costs are ordinary and necessary in the course of business. An example would be meeting a client for the first time to have a sales lunch (clear business objective – get sales!) or lunch with a vendor to discuss terms of a new deal.  The meal must also not be lavish or extravagant. Think VIP boxes at sporting events. This is not determined by a dollar amount or restaurant, but rather, on the situation. You can deduct the cost of tickets to sporting events, just know it will be subject to the 50% limit and must not be what the IRS considers “lavish”. A quick coffee on your way to the office is generally not deductible as it’s personal in nature. Consider meeting for a coffee with a client or business partner with an agenda. All of the sudden your coffee is deductible!

Amount of Deduction

The amount you may deduct is limited to 50% of the actual expenses or the standard meal allowance, commonly referred to as "per diem". This is a set rate you use based on the city you are traveling to or living in. You can look those up here. For example, if you go to NYC on business, your per diem for meals and “incidental expenses” would be $74. If you spent more than $150 in a day on meals in NYC. The method that yields the greater deduction would be the actual method where your deduction would be 50% of the $150, or $75.

Recordkeeping

The rule of thumb is to keep your receipts for 3 years in case of an audit. This doesn’t have to be a daunting task, you can easily save everything in Dropbox, Evernote, Receipt Bank, or even save it in a photos folder on your phone.  The IRS mentions the importance of writing on the receipt, who you were with and what you discussed. Ensure the itemized receipt shows the date, time, and location of the meal.

Travel Meals

Travel meals are usually deductible at 50% There is an exception for the Department of Transportation “hours of service” who could deduct 80% vs 50%; interstate truck drivers qualify under the DOT rules. For a full discussion of travel expenses, watch for the “Can I Deduct That? Travel Edition”.

Conclusion

You are entitled to a legitimate business deduction for ordinary and necessary business meals. This includes meals with a business purpose, discussing business with a client, potential client, partner, or vendor etc. or while traveling away from home. You can either deduct 50% of the actual amount or the standard rate, commonly referred to as "per diem". You need to keep copies of receipts for 3 years in case you are audited. This is the third edition of Timber Tax's #canIdeductthat series. If you have a question or suggestion for an article, email us at luke@timbertax.co!

 

References

https://www.irs.gov/taxtopics/tc512.html

https://www.irs.gov/taxtopics/tc305.html

https://www.irs.gov/publications/p463/ch01.html#en_US_2016_publink100033781

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf


 

Luke Frye