Answers On Deducting Expenses For Entertainment And Foods

This time we look at expenses for foods and entertainment and exactly how these are deductible. Is all M&E deductible? Q: Are all business meal and entertainment expenditures deductible? The taxes guidelines for deductibility of business foods and entertainment (M&E) have thorough requirements. These can only just be deducted as business expenses when they may be “directly related” or “associated” with the active conduct of the trade or business.

Lacking a valid business purpose, the expenses aren’t deductible (and the worker may need to report the value of the expenditures in their income). Upon establishing a valid business purpose, the M&E expense falls into one of two categories: 50 percent deductible or completely deductible. What’s a valid business purpose?

Q. How are M&E expenses established as developing a valid business purpose? A. All business expenditures must meet up with the general deductibility dependence on being “ordinary and necessary” to carry on business. Regarding M&E, the principal purpose for each event must be “directly related” to furthering business and the expectation of attaining specific, concrete business benefits.

An expense may qualify as “associated with” the active conduct of business if the function precedes or comes after a considerable and real business discussion. Q. Having set up a valid business purpose, which expenses are deductible under the general 50 percent limitation? A. All expenses not at the mercy of the 100 percent deductibility exceptions – which I’ll enter to under the next question – are subject to the 50 percent restriction. These include meetings with clients, customers, and vendors at your house of business, a restaurant, or other location; foods while traveling away from home on business; and expenses while attending a business convention, business meeting, or business luncheon.

Related fees and tips are also contained in the amount that is subject to the 50 percent limit. Q. Which expenditures are 100 percent deductible? A. While many business owners are frustrated to learn that valid expenses are subject to a 50-percent limitation, few realize there are exceptions compared to that. • Employee celebrations – The cost of providing beverages and food at company outings, holiday parties, or other gatherings primarily for the advantage of rank-and-file employees and their guests can be completely deductible.

• Items provided to the public – Expenses related to foods provided to everyone are fully deductible. These may include free samples offered by a store, cookies equipped by a Realtor at an open house, hot dogs given at an automobile seller away, food offered in a working office lobby, and similar situations. • Charitable-sponsored sports – The ticket cost to a qualifying charity sporting event (such as a charity golf competition) is completely deductible, when meals are included even. To qualify, the charity must give completely of its net proceeds to a charity and mainly staff the event with volunteers.

• Client reimbursed expenses – If food expenditures are incurred while providing service to a client and the ones expenditures are accounted for and billed to the client individually, a full deduction is available to the service agency then. If separate billing doesn’t occur, the 50 percent disallowance applies to the service provider. • Meals served with an employer’s premises – On-premise meals furnished for a valid business reason and for the employer’s convenience are completely deductible.

Q. So all I have to deduct M&E expenses are my receipts? A. The receipt is a starting point but greater than a receipt is required. The IRS requires careful, detailed information be preserved to substantiate that each business food and entertainment event have a valid business connection. While a receipt might substantiate the amount spent, time, and place, you won’t provide the business purpose and the business relationship with the individuals involved. As memories can fade quickly, it should be company policy to record such information when the expenses are submitted.

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Got a tax question you desire answered? General interest questions will be answered in future columns, but it may not be possible to answer specific questions. BeachFleischman PC, 1985 E. River Road, is Southern Arizona’s largest CPA firm. Advice is not meant or written to be used, and cannot be used for the intended purpose of avoiding penalties under the inner Revenue Code or suitable condition or local taxes law provisions. This column shows up the first and third weeks of each month.

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