One of the advantages of running your own business is taking lots of tax deductions. And some are pretty cool — like those for meals and entertainment (M&E).
Yet, the IRS has long kept a suspicious eye on this area. Let’s face it, there are likely many instances when the deductions are far from legit. In other words, you need to understand the rules, which can get complicated and sometimes laughable.
First of all, with only a few exceptions, you are limited to deducting 50 percent of your M&E expenses. No doubt, this is another indication of the IRS’s ingrained skepticism.
Now it’s a good bet that many of your M&E deductions will be for meals. So long as there is a business purpose and discussion for each one, then you will be fine. This is the case even if no contract, order, investment or deal comes from the meal.
If you are on an overnight business trip, then you can deduct the meals you have alone. Yet you still must abide by the 50 percent deduction rule.
But where things get tricky is entertainment. For the most part, the activities can be quite broad, including fun at nightclubs, sporting events, concerts, movies, golf, vacation spots, hunting locations, yachting trips, fishing trips and so on.
The issue? The IRS thinks that you cannot talk about business while engaging in these kinds of activities. This means you need to have a business discussion before or after the entertainment. It seems a bit silly but, then again, so do many IRS rules!
To deal with this, you will need to have the discussion during the same day for the entertainment. There is an exception if the person you are meeting with is from out-of-town.
You can even have the entertainment at your home, such as with a dinner, but it is advisable to keep the number fewer than 12. The IRS believes you will have more opportunity to talk to everyone about business.
Yet, if the entertainment is for your birthday or some other type of social event, then expect the IRS to get antsy. The agency will likely deem this to be personal and not deductible.
However, whether the expense is a meal or entertainment, you need to be diligent with record keeping. With your smartphone, notebook or organizer, you should note the following:
- Cost, location, nature and date of the meal or entertainment.
- Names, titles and occupations of those involved.
- The reason for the meal or entertainment.
Granted, all this is a bit of a hassle but the deductions can add up. For many entrepreneurs, it is certainly worth the effort.