The Three Categories of Meal and Entertainment Expenses

Linda Zevnik, CPA
January 25, 2010 — 1,780 views  
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As you record and document the expenses in your business, a common sticking point occurs when trying to determine meal and entertainment expenses that are nondeductible, 50 percent deductible and 100 percent deductible. To help ease recordkeeping for both you and your employees, consider establishing these three separate expense categories within your company's expense report.

Documenting Expenses

In order to deduct business meal and entertainment expenses, the expense must be directly related to, or associated with the active conduct of a trade or business, or for the production or collection of income.

You must be able to prove:

  • The amount of the expenditure
  • The time, date and place of the expenditure
  • The purpose of the business discussion
  • The identification of the people who participated

50 Percent Deductions

Usually only 50 percent of otherwise deductible meals and entertainment expense is deductible. Some expenses that would be subject to the 50 percent limit are:

  • Ticket price for sporting event associated with a business discussion
  • Lunch with customer, client or employee associated with a business discussion
  • Taxes and tips relating to a meal or entertainment activity
  • Room rental for a dinner or cocktail party (assuming the event met the business relation test)

100 Percent Deductions

Some business meal and entertainment expenses are 100 percent deductible. These include:

  • Transportation costs to and from a business meal or entertainment activity, may be 100 percent deductible or 50 percent depending on the facts.
  • Meals provided on the employer's premises for the employer's convenience, if more than 50 percent of the employees are furnished meals for the employer's convenience
  • Promotional activities that are made available to the general public
  • Employer-provided social/recreational expenses primarily for the benefit of employees who are not highly compensated, such as a summer picnic or holiday party
  • Business gifts up to $25 to any one individual per tax year
  • Tickets to charitable fundraising sports event

Nondeductible Items

Unfortunately, some business meals and entertainment expenses are nondeductible and need to be categorized as such. Examples include:

  • Lunch with customer, client or employee without a business purpose/discussion
  • Ticket price for sporting event that you do not attend
  • Club dues; for example, country clubs, golf and athletic clubs
  • Lavish or extravagant entertainment expenses (basically unreasonable expenses)

Note that there are a number of special rules in this area, for example a special 20 percent limitation applies to meals consumed while away from home (i.e. overnight) by individuals subject to the hours of service limitation of the Department of Transportation (e.g., commercial pilots, truck drivers, etc.). You may want to print these deductible categories on the back of your expense report. If you don't have one already, consider creating a policy on reimbursement. The policy can be printed in your company's employee handbook as well as printed on the back of the expense report to help employees better document their expenses.

Linda S. Zevnik, CPA (Mentor office)

Linda Zevnik, CPA

Rea & Associates, Inc.