A key part of any business is establishing client and vendor relationships or recruiting potential employees over meals and entertainment. These costs can add up rather quickly, but the good news is that some of these expenses can be deducted under the right circumstances.
Here are a few things to remember about deducting meal and entertainment expenses.
1. 50% Business Meal Deductions
For meals with clients, vendors, or potential employees or meals consumed during business travel, you can deduct 50% of their costs. You can determine meal costs by keeping track of the actual costs of meals or by using the standard IRS meal allowance, which varies based on location.
Regardless of which method you use, it is important to keep receipts of all meals to make sure your business knows its actual expenditures. Have your employees keep all business meal receipts and report actual costs on their expense reports.
2. 50% Entertainment Deductions
Much like business meals, 50% of entertainment expenses such as nightclubs, theatres, sporting events, or recreational trips with clients, vendors, or potential employees can also be deducted.
In order for the expense to be deductible, it must be an ordinary and necessary business expense, and the main purpose of the activity must be for business.
3. 100% Meal and Entertainment Deductions
Food or beverages your business provides to your employees occasionally as a de minimis benefit can be completely deducted. An example of such an expense is refreshments provided during meetings.
Also, if the meal or entertainment expense was
- An event to promote goodwill in the community,
- An event to benefit a charity, or
- An essential part of a business function,
100% of the costs may be deducted.
4. Non-Deductible Expenses
Meal and entertainment expenses which are primarily for personal reasons, even if they were incurred during a trip that involved some business, are not deductible. However, you may still deduct the costs that were directly related to the business portion of the trip.
To ensure this requirement is met, it is important that your employees maintain accurate records of their trips and submit them with their expense reports.
Automating Expense Reports Can Help
Manually keeping track of expense data submitted on paper expense reports can get difficult. Trying to reconcile this manual expense report data with the complicated IRS rules regulating business deductions can create all sorts of headaches for your accounting staff.
Automating expense reports can keep track of the information for your accounting department as each expense report is submitted, making it easier for them to focus on which deductions they can take.