Suppose you take your best client out to dinner to celebrate your business relationship. If you own a business, are self-employed or run a side business, can you deduct any of the cost?
Here are some tips to stay on the right side of the new rules:
Make clear it’s a business meal
In the past, small businesses could deduct 50 percent of the costs of both business meals and entertainment with clients. Now, the meal deduction remains but entertainment costs are no longer deductible.
The problem is that separating a business meal from client entertainment is not always clear-cut. If you treat your best clients every year to dinner and tickets to a sporting event, the tickets are not deductible, but the meal may be.
If you use the meal to discuss business, you should be safe to take the deduction. But if it’s just a social event and business is not discussed, the deduction is now harder to justify. That means it’s up to you to make clear it’s a business meal.
The easiest way to do this is to keep a business log for your meal expenses that includes a field labeled business purpose. In addition to recording the time, date, place, and cost of the meal, list each attendee, their company affiliation and professional title. Then add a short description of the specific business purpose, such as: Discussed new products and competitive price structure.
For the strongest defense of your deduction, try to define the purpose of the meeting as something that could have an impact on your bottom line. Simply chatting about trends in your industry may not pass muster if you are audited under the new rules.
Avoid luxury meals
Deductions for extravagant expenses on meals and entertainment will always be hard to defend. So if you are having a serious business discussion over dinner, make sure it’s not at a luxury restaurant that will give you a huge dinner bill.
Remember, business meals are still deductible, but must be properly documented. If done correctly this deduction should withstand any audit risk.