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.
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