The IRS has specific rules for deducting meals and entertainment expenses. Here is a summary of the key points:
1. Meals Deduction:
- Deduction Rate: Generally, 50% of the cost of business-related meals is deductible.
- Qualified Expenses: Meals must be ordinary, necessary, and directly related to or associated with the active conduct of a trade or business.
- Who Qualifies: The taxpayer (or an employee) must be present at the meal. Meals provided to clients, customers, or business associates are deductible.
- Documentation: You need detailed records that show the date, time, location, attendees, and business purpose of the meal.
- 100% Deductible Meals: In some cases, meals may be 100% deductible, such as meals provided to employees for the convenience of the employer or certain meals provided during events (e.g., office parties).
2. Entertainment Deduction:
- Elimination of Entertainment Deduction: The Tax Cuts and Jobs Act of 2017 eliminated the deduction for most entertainment expenses. This includes tickets to events, club memberships, and outings, even if they are for business purposes.
- Exceptions: Some entertainment expenses remain deductible if they are directly related to employee recreation, such as holiday parties or company picnics.
3. Combined Meals and Entertainment:
- If a meal is provided during an entertainment event, only the meal portion may be deductible (50%). The entertainment portion itself is not deductible unless it falls under one of the exceptions mentioned above.
4. Detailed Record Keeping:
- The IRS requires a clear log or documentation for meals, including:
- Date and place of the meal,
- Business purpose of the meal,
- Names of attendees,
- Amount spent.
Failing to maintain proper records may result in the disallowance of the deduction during an audit.