Meals and entertainment is deductible at only 50% of the cost. You are allowed to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee.
You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests.
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:
The main purpose of the combined business and entertainment was the active conduct of business,
You did engage in business with the person during the entertainment period, and
You had more than a general expectation of getting income or some other specific business benefit at some future time.
Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. You do not have to show that business income or other business benefit actually resulted from each entertainment expense. So even if the expense did not result in additional business, or a new client or customer, you can still deduct it.
Even if your expenses do not meet the directly-related test, they may meet the associated test. To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is:
Associated with the active conduct of your trade or business, and
Directly before or after a substantial business discussion
So if you invite a client or potential client to an event, or out to dinner, and business is the main topic of the meal, or if it takes place immediately after a business presentation, you are allowed to deduct 50% of the cost. You still need to substantiate the business purpose, where the expenses took place, the topic of conversation and who was in attendance.
IRS Publication 463 has some good information on Meals & Entertainment, including the information I gave you above. Here is a link to it: http://www.irs.gov/publications/p463/ch02.html This Publication also has some good examples as to how various M & E situations should be handled.
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