After You Buy a Round, Don't Forget the Receipt: What You Need to Know for Your Meals & Entertainment Expenses

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.

An Ordinary and Necessary Expense

First, if an expense qualifies as ordinary and necessary, it must then meet one of the following tests:

  • Directly related test
    • The main purpose of the expense was the active conduct of business
    • The taxpayer engaged in business during the entertainment period
    • The taxpayer had more than a general expectation of generating income or obtaining another business benefit at some future time
  • Associated test
    • The expense must be associated with the active conduct of a trade or business
    • The entertainment must be provided directly before or after a substantial business discussion

M&E Expense Deductibility

Second, the percent of the deductibility of the M&E expenses falls into one the following three categories:

  • 100% Deductible - A few examples:
    • Meals consumed while working overtime
    • Lunch or dinner meetings for the convenience of the employer
    • Company holiday party
    • Business travel
    • Company outing
    • Excess over FMV of tickets to charitable fundraising events
  • 50% Deductible - A few examples:
    • Client/customer entertaining
    • First $25 for client/customer gifts
    • Taking employees to lunch/dinner
    • Meals related to conferences and seminars for employees
    • Meals at networking events
    • FMV of tickets to charitable fundraising events
  • 100% Non-deductible - A few examples: 
    • Cost in excess of $25 for client/customer gifts
    • Club dues
    • Personal expenses, which include taking your family to a sporting event

Internal Revenue Code (IRC) §274

Lastly, we need to have adequate record of the expense under IRC §274, which includes the following:

  • The receipt and amount
  • The time and place
  • The business purpose 
  • The business relationship to the taxpayer of any person entertained

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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