OUR THOUGHTS ON:

Meals & Entertainment Expenses - Are They Deductible?

Tax

By William Winter

Taxpayers often incur business expenses for entertaining clients, customers, or employees. Such expenses, often referred to as meals and entertainment expenses (M&E), 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.

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 expenses fall into one the following three categories:

  • 100% Deductible - A few examples:
    • Meals consumed while working overtime
    • Lunch, 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

Please contact a Schneider Downs tax professional if you have further questions regarding the deductibility of M&E expenses.

© 2014 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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