Five tests the IRS uses to support your business meal deduction
From Melinda May, CPA | Featherstone
A Fredericksburg Today Partner
Drilling down, the IRS listed five tests that must be passed in order to support the deduction:
- The expense must be an ordinary and necessary expense, paid or incurred in carrying on a trade or business.
- The meal can’t be considered lavish or extravagant, considering the business context.
- The taxpayer (or an employee) must be present.
- The other party must be a current or potential business customer, client, consultant, or similar business contact.
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food and beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts and must be priced reasonably.
Example: Carol Clark takes a client to a baseball game, where Carol buys hot dogs and drinks for herself and the client. The cost of the game tickets is not deductible. Carol can deduct 50% of the cost of the food and beverages as long as she can show that these outlays were separate from the ticket cost.
Note that the IRS uses the expression “food and beverages” in this notice. This may imply that the cost of taking a business contact out for coffee or alcoholic drinks may be 50% deductible, even if no meal was served.
It’s also worth noting that activities generally perceived to be entertainment may be deductible business expenses ― if you’re in an appropriate business. The IRS gives examples of a professional theater critic attending a play and a garment manufacturer conducting a fashion show for retailers. Our office can let you know if some type of entertainment could be considered deductible advertising or public relations for your company.