This article has been excerpted from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn't Want You To Know , available from Entrepreneurpress.com .
Are you one of those self-employed business people who feels a little gun-shy about writing off your travel, meals and entertainment expenses? You're out there having fun in the name of business and worried the IRS will not equate those costs to valid tax deductions, correct?
Of all the business activities you perform, travel, meals and entertainment are preferable to placing an office supply on order or writing a check for a subscription to My Boring Trade magazine. Oh, the guilt! Work is no longer drudgery when you're enjoying a fabulous dinner while cutting an exciting business deal. Or flying off to Aruba for the annual trade show. What could be better? Writing it off, that's what. And so you do. And so you should.
The key is demonstrating the business purpose and making the deduction correctly. There are several important rules to follow to ensure your meals and entertainment expenses stand up to tax-time scrutiny.
- You needn't supply receipts for meals or entertainment that cost less than $75. However, you need some sort of documentation to prove your case. An entry in your appointment book with the location, names of those you entertained, content of the meeting and the total cost is sufficient. Might as well have kept the receipt, correct? Meals and entertainment are only 50 percent deductible. Meals you eat alone are not deductible unless overnight travel is involved. While traveling overnight for business you may deduct either the actual meal expense or the IRS approved per diem--the standard meal allowance. Rates and charts are available in Publication 463 on the IRS website.
- If you sell meals, entertainment, or use of facilities to the public, for example, or you own a restaurant or nightclub, don't worry about that 50 percent limit. It doesn't apply to you if the meal or entertainment takes place at your establishment. If you're a clothing designer who puts on a fashion show that is a normal activity for your business, that falls under advertising, which is 100 percent deductible.
- You also will not be subject to the 50 percent limit if you pay for a package deal that includes a ticket to a qualified charitable sporting event as long as all the proceeds go to the charity, volunteers staff the event, and the event's main purpose is to benefit the charity.
- The IRS may disallow anything it considers "lavish or extravagant." Does it offer a concise definition for "lavish or extravagant"? Of course not. The best it does is state that the cost must be reasonable. Here we go again with subjective opinion. So it's up to you to convince the auditor that the cost is reasonable. Will the auditor consider your income level and necessity to impress? Let's hope so. Let's also remember that we have appeal rights. You can always run to a manager, who hopefully has more exotic tastes and will agree with your propensity for spending. Just try to keep it down a little.
- The business discussion during the meal or entertainment must be substantial. There have been plenty of associates, friends, relatives, and clients who joined me for lunch and discussed everything from love life problems to politics to "Hey, how 'bout them 9ers?" Everything but business. The check arrives. Snickering, they pick it up, and say, "So how's biz?" I put on my auditor look of disdain, and retort, "That's why I'm not picking up this tab. This meal is not a write-off." Sorry, but saying, "How's biz?" while you're whipping out your Visa card isn't exactly a substantial business discussion.
- You cannot deduct any "It's my turn to pay" meals. If you dine often with a client, employee, or associate and one time you pay, then the next time he pays, it is not considered a valid and deductible meals or entertainment expense.
- Business intent as a primary focus during hunting and fishing trips or aboard yachts, pleasure boats, and airplanes is difficult if not impossible to prove in order to validate the expense as deductible. Be prepared to lose the deduction or be armed with substantial proof of primary business intent and content in order to convince the auditor to allow it. Even then, it likely will not fly.
- Cost of entertainment facilities including mortgage interest, property taxes, depreciation, rent, and so on for swimming pools, bowling alleys, tennis courts, cars, apartments, homes in a vacation resort, and hotel suites are not deductible. Don't confuse this with occasional use of an entertainment facility. For example, you can certainly deduct the one-week cost of a trade show hospitality suite that shows off your newest products. However, you cannot write off the cost of a yearlong contract for a hotel suite that you use for entertainment purposes or the ownership of a cabin in the woods used primarily for entertaining clients and employees.
- You cannot deduct dues paid to country clubs, golf and athletic clubs, airline and hotel clubs, and clubs that provide meals while participating in business discussions.
Bonnie Lee is the founder of Taxpertise located in Sonoma, CA, a firm providing bookkeeping, payroll services, QuickBooks Training, income tax preparation, and tax problem resolution including audits, offers in compromise and other representation issues. She is also the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know (Entrepreneur Press, 2009).