If ever there was an abused expense deduction’ in the small business world THIS IS IT. You know, like when every meal you ever ate you deducted for tax purposes.
The overuse of this expense category led to many audits by IRS and many disallowed deductions resulting in an unwanted tax bill to the business owner. Hence, the laws are now a bit stricter.
Kind of like when you give your children a curfew and each time they come in a little later and a little water until you lose it. The first time you’re like okay, don’t let it happen again. The 2nd time a bit more upset with a stronger warning. And instead of learning, they come in yet a 3rd time late. YUP, ALL DONE! GROUNDED.
The same thing happened here with IRS. Now we need to adhere to 5 RULES per the code, in order to solidify and justify taking this on your tax returns.
These are the 5 RULES FOR THE 50% ALLOWABLE DEDUCTION:
1. THE EXPENSE MUST BE ORDINARY AND NECESSARY PER IRC SECTION 162a.
That sounds all fancy, but what does it mean IRC Section 162a is a code section that is a reference for trade or business expenses. It basically states deductions will be allowed for all ordinary and necessary expenses incurred with regard to carrying on a trade or business in any one given year.
THUS, you CANNOT deduct every single meal you eat! or event you attend! Let’s be real people
2. THE MEAL CANNOT BE LAVISH OR EXTRAVAGANT.
This doesn’t mean that an expensive meal will be disallowed, but it needs to be reasonable considering the circumstances.
So let’s say you are courting Jay Z to be a client! I am pretty sure we can elevate the meal to beyond Chic-Fil-A. However, we need to be mindful of this on every occasion.
3. THE MEAL MUST BE PROVIDED TO A CURRENT OR POTENTIAL CLIENT CUSTOMER, CONSULTANT OR SIMILAR BUSINESS CONTACT.
Pretty straightforward. No need to dig that any deeper.
4. YOU, THE TAXPAYER/BUSINESS OWNER, MUST BE PRESENT AT THE MEAL
5. IF THE MEAL IS PART OF AN ENTERTAINMENT ACTIVITY, THE COST OF THE MEAL MUST BE SEGREGATED AND BROKEN OUT OF THE ENTERTAINMENT PART.
Whether it’s separately stated on the bill or it’s a separate invoice entirely, only the meal is qualified.
I have been hearing so many new clients telling me that their previous tax advisor said that no meals and entertainment were deductible.
To which my reply would seem obvious YES IT IS Let’s just follow the rules Simple, isn’t it.
Everyone’s circumstances are different, so please consult! your tax advisor or BFF/CPA to discuss your business expenses specifically.
Also, bear in mind, the Tax Code changes constantly. So the rules that I have stated are as of right now (11/2020). They could change tomorrow! (not really but still). Stay on top with your advisor or give us a shout.