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Meals and Entertainment Expenses

business client accounting manual client onboarding Jul 26, 2021

Entertainment expenses incurred to entertain a client, customer, or employee may be deductible if the expense meets two tests. First, the entertainment expense must be ordinary and necessary (those that are normal, usual or customary and are appropriate and helpful in the development and maintenance of your business). Second, it must pass the directly related or the associated test. This is a four-part test:

  1. You must at the time of making the expenditure have more than a general expectation of deriving income or other specific business benefit at some time in the future.
  2. During the entertainment period, you must actively engage in a business meeting, negotiation, discussion or other bona fide business transaction.
  3. The principal character or aspect of the combined business and entertainment must be the active conduct of your trade or business.
  4. The entertainment expense must be allocable to you and the person or persons with whom you are engaged in the active conduct of your business during the entertainment. (The expenses of entertaining spouses and other non-business guests are not directly related).

Generally, the deduction for business related meals and entertainment is limited to 50% of the expense. However, you may deduct 100% of the cost of meals that are furnished to employees at company picnics or holiday parties. Meals furnished to employees at the site of an employer’s restaurant or catering service are also 100% deductible. Meals that qualify as a de minims fringe benefit (expenses that have a value so small as to make accounting for them unreasonable or administratively impracticable) are also 100% deductible.

You must keep adequate records to substantiate these expenses. Adequate records will show the name and location of the restaurant, dates, charges for the meals or entertainment, the number of people served, and the business purpose.

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