To be qualified for deduction, business meal and entertainment expenses must be directly associated with the active conduct of a trade or business, the production or collection of income.
People must be able to prove:
The amount of the expenditure
The time, date, and place of the expense
The purpose of the business discussion
The identification of the people who participated
It can be challenging; however, to understand which meals and entertainment are a valid deduction, and what percentage of costs are actually deductible, let's see following information about main types of those deductions.
1. The 50% limit applied when:
Traveling away from home (whether eating alone or with others) on business,
Entertaining customers at your place of business, a restaurant, or other location, or
Attending a business convention or reception, business meeting, or business luncheon at a club.
Expenses subject to the 50% limit include:
Taxes and tips relating to a business meal or entertainment activity,
Cover charges for admission to a nightclub,
Rent paid for a room in which you hold a dinner or cocktail party, and
Amounts paid for parking at a sports arena.
Certain meal and entertainment expenses that aren’t business related, such as the production of income, including rental or royalty income, or the cost of meals included in deductible educational expenses.
Does the 50% Limit Apply to Your Expenses?
2. Nondeductible Items
Lunch with customer, client or employee without a business purpose/discussion
Ticket price for sporting event that you do not attend
A meeting or discussion during what is essentially a social gathering, such as a cocktail party.
A meeting with a group that includes persons who aren’t business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts.
Lavish or extravagant entertainment expenses (basically unreasonable expenses)
3. Exceptions to the 50% Limit
3.1 Expenses not subject to 50% limit
1. Employee's reimbursed expenses under an accountable plan.
2. If you are self-employed and all of the following requirements are met.
You have these expenses as an independent contractor.
Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.
You provide adequate records of these expenses to your customer or client.
3. If you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community.
4. Actually sell meals, entertainment, goods and services, or use of facilities to the public.
5. Pay for a package deal that includes a ticket to a qualified charitable sports event.
3.2 The 80 % limit applied for individuals subject to "hours of service", including
Individuals subject to the Department of Transportation's "hours of service" limits include the following persons.
Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
Interstate truck operators and bus drivers who are under Department of Transportation regulations.
Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations.
Certain merchant mariners who are under Coast Guard regulations.