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When we are in entertainment mode, we take pride in buying a round of drinks for our friends. However, you should not forget the receipt and remember who is partaking in the round. If you are buying drinks for a client or prospective client, the IRS has and always will request documentation for your meals and entertainment (M&E) expenses. Professionals who serve the automotive industry build relationships with customers primarily by entertaining. Such expenses must be both ordinary and necessary in carrying on a trade or business before they can even be considered as a deductible expense. An ordinary expense is one that is common and accepted in a trade or business. A necessary expense is one that is helpful and appropriate for the business. There are three steps to consider in order to deduct the round you purchased.
First, if an expense qualifies as ordinary and necessary, it must then meet one of the following tests:
Second, the percent of the deductibility of the M&E expenses falls into one the following three categories:
Lastly, we need to have adequate record of the expense under IRC §274, which includes the following:
Please do not miss out on an expense due to an administrative matter. These steps are important to prevent IRS scrutiny of a valid business expense.
If you have further questions regarding the deductibility of M&E expenses, please contact Steve Barber.
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