Entertainment and meal deductions: What you can write off RTLU

A "How To" on keeping track of and documenting meal deduction business expenses

Meal and entertainment deductions may seem overwhelming, but you can easily determine what to write off (and how to document it) and avoid any missteps with the right approach. Here’s what you need to know about the fundamentals that apply to business meals and entertainment so that you can make smart choices and keep tidy records.

Know what a deduction is for

The meal-and-entertainment deduction is a feature of the tax code designed to cushion actual business expenses. “It’s not that difficult to understand in concept,” said Craig Richards, a tax lawyer at the New York firm Sichenzia Ross Ference LLP, who is not representing any of the parties involved in Loughlin and Giannulli’s case but who has worked on deals for other clients charged with various forms of fraud. So meals that are in the service of business discussions, client entertaining, employee meetings or expenses related to work-related travel are generally included. Business use versus personal pleasure is the main test for qualification.

Separate meals from entertainment

Meals and entertainment, while often lumped together, are dealt with differently. Meals are costs for food and drinks during a business undertaking, while entertainment would include entertainment events or activities such as performances, sports games or recreational trips. For purposes of record-keeping and deduction determinations, treat these as separate categories: the people who flew on the plane, the business reason for boarding it and how much can be attributed to business use.

Who can be included?

Business meals are deductible in situations where the actual discussion or business meeting is conducted over the meal and if a client, prospect, vendor or employee is typically present. Company gatherings, business trainings or employee meals during overnight travel for work also may be deductible. If the meals you are expensing don’t have a direct, clear business condition to them, be wary: Many social or recreational meals (even with employees) may not be fully deductible.

Record the business reason for and attendees at each reunion

Good documentation can turn a fuzzy expense into a defensible deduction. Document meal by meal: date, location, cost and names and business relationships of attendees and the brief business purpose. i.e.: "April 3rd lunch to discuss scope of project and timing." Keep notes and, if applicable contemporaneous notes on what was said or decided.

Allocate mixed-use expenses

And sometimes a single expense is part business and part personal. If the dinner you mix with a non-business celebration is a business dinner, divide the cost between the two and keep records to show how you figured the expense of each part. Deduct only the portion that qualifies. When the business purpose for an entertainment expense (e.g., a meal) can be identified as directly preceding or following a substantial and bona fide business discussion, then merely differentiate between the two expenses and record both.

Understand limits and exceptions

Common and subtle restrictions exist that affect how much can be deducted. Certain types of meals, especially at employer-hosted events or meals provided to enable the employer’s business, may be entirely deductible. Excessive or unreasonable expenses in relation to the circumstances however, may be disallowed or partially disallowed. On the road business meals or meals included with conference fees: There's other treatment here. When in doubt, concentrate on proving that the expense is ordinary and necessary.

Use practical recordkeeping strategies

Keep documentation simple and organized: save receipts, have a business expense log, jot down notes on business discussions. Scanned or photo copies are fine so long as it's clearly legible and contains the necessary information. Set up a simple naming or filing system for meal deduction business entries, so you can easily find and check charges when you pay your taxes or have questions.

Plan ahead for client entertainment

When you’re figuring out what to serve partners or clients, establish an agenda. The receipt is also accompanied by a brief written message explaining the purpose of our meeting, enhancing legitimacy. Don’t mix in too many personal items with client “entertainment". Maintain invitations, agendas or subsequent emails that confirm the business purpose of the meal or entertainment and information regarding who attended and what business was discussed.

Employee meals and company events

The meals you feed employees during meetings, training or company parties ¹ will typically be deductible at a different threshold than client meals. Keep a record of the reason for the event, who you invited and why the meal was business-related. "E.g., a team lunch completed at the afternoon of a full day training session should offer evidence linking the meal to the training activity.

Handling travel-related meals

Other than that, the rule is when you travel for business business meals while traveling are treated as a business expense. Keep a record of the dates you traveled, where you went and for what business purpose, and how many meals you had during that travel. Maintain a record of costs for each day you travel and link those to business gatherings, such as meetings, site visits or conferences.

Avoiding common mistakes

The most frequent mistakes are: Not recording who attended and the reason for the business, blending personal and business meals without apportionment, providing receipts that can’t be read (! Dealing with Them: Set up a routine for tracking the who, what, when, where and why of each meal as well as filing all backup records in an easy-to-retrieve system.

Sample documentation checklist

• Time and place of the meal.
• The names and business relationships all attendees.
• Business use cases and discussion topics.
• Amount and total amount of money claimed
• Receipt or proof of payment
• URL to associated business activity (contract, meeting agenda, travel itinerary)

By the regular use of this list, you will find it easier to document that meal deduction business expenses have been substantiated and will have eliminated much of the year-end record sorting needed.

Advisor collaboration and internal policy coaching

Create an internal policy that specifies which types of meals are eligible for business deduction, what paperwork is needed to prove such expenses and who can sign off on them. Train your employees, and anyone who touches expense report processing opts in, to follow the standard. If you have particular or complicated circumstances, seek help from a tax professional who can explain how the rules impact your industry and operations. An in-house policy coupled with expert advice creates an effective platform from which to make decisions on deduction.

Conclusion

Deductions for meals and entertainment are valuable, but must be treated with care. Concentrate on documenting the business reason, keeping meals and entertainment separate, properly allocating mixed expenses, and keeping good records. Clearly define your process for recording and discipline on maintaining receipts for your business meal tax deduction, and you can rest assured that you are claiming truly deductible expenses from the tax man without any risk of confusion.