Be Confused No More by Business Travel, Meals and Entertainment

Many of our clients and small business owners constantly struggle with separating their business lives from their personal lives. They ponder what is a deductible expense and what is not, and this is particularly true in the areas of business travel, meals, and entertainment. Over the next several blogs, we’ll discuss many topics as it relates to this matter. There are many regulations that govern this area of tax law, but one simple rule can always be of assistance to you if you ever find yourself questioning an expense: Contact your CPA! Without sounding too much like an advocate for our profession, in many cases, a simple phone call can save you time, money, and be a huge source of stress relief.

Business Meals and Entertainment:

Taxpayers often mix business with pleasure when they entertain—or have a business lunch or dinner with—a business associate or client. Or, if not pleasure, there is at the very least an element of personal consumption involved in what is often a necessary part of doing business. Either way, the meal or entertainment expense results in deductions, as long as it:

• is directly related to or associated with the active conduct of the taxpayer's trade or business, and
• isn't lavish and extravagant under the circumstances (as regulated by IRS Code)

The “directly related to” or “associated with” tests don't apply to expenses directly related to bona fide business meetings of a taxpayer's employees, shareholders, agents or directors, provided the meeting is held principally for discussion of trade or business. They also do not apply to expenses for entertainment directly related to and necessary for attendance at bona fide business meetings or conventions of organizations such as business leagues, chambers of commerce, and real estate boards.

Deductions for otherwise qualifying business meal and entertainment expenses are generally limited to 50% of cost. In effect, the disallowed portion of the expense reflects the fact that business meals and entertainment inherently involve an element of personal benefit.

Both business meals and business entertainment are generally treated the same for deduction purposes with the exception of one important difference: A business meal is not deductible unless the taxpayer (or an employee) is present when the meal is furnished. By contrast, a taxpayer can deduct 50% of the cost of an entertainment event under the “associated with” rule even if he does not attend the entertainment event.

What is Entertainment?

Entertainment covers “any activity of a type generally considered to constitute entertainment, amusement, or recreation,” including activities such as entertainment at nightclubs, cocktail lounges, theaters, country clubs, golf or athletic clubs, sporting events, and hunting. However, there are certain entertainment facility and club dues that fall into a nondeductible category. An objective test is used to determine whether an expense is “entertainment” or another type of business expenditure.

Business entertainment rules apply to the entertainment of any “business associate,” a term that is defined broadly by the regulations. It includes a person “with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business, such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

Join us again for our next blog where we continue to look at the many details that are involved in this area of your business and tax picture. Specifically, we’ll look into the application of deduction limits and reimbursement situations and those meals and entertainment expenses that might be exempted from said limits.

Until then, tax season is upon us, so get your documents in order and get them to your CPA and stay ahead of the curve!

brad@mcarthurco.com
704.544.8429