by Melissa Whaley | Featured Contributor
If you’ve ever heard someone say:
“Oh you can deduct that”
but wondered if they were right, Here are the truths about deducting meals and entertainment in the US.
If you’ve ever heard someone say “Oh you can deduct that” but wondered if they were right, Here are the truths about deducting meals and entertainment in the US.
Your Latte (or lunch) is deductible when…
1) It is ordinary and necessary to entertain clients in your industry. “Ordinary and Necessary” are the IRS’s favorite words for any small business deduction. What they are really looking for is whether or not it is logical for you to be spending money to entertain a client. A Vegan health coach probably wouldn’t be taking their client to a steakhouse, nor would a virtual assistant be buying lunch for a client who lives across the country (unless they were visiting).
According to IRS Publication 463 “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate.”
2) It was directly-related or associated to your business. That means you have a business project, or purpose, associated with your meal. So if you are a graphic designer, that means you met at a coffee shop with a current (or potential) client to discuss their upcoming website branding; and bought a Latte for the both of you while you talked. Another example is if you are working so hard on a project with your team that you decide to order pizza for the whole crew.
What would not qualify are daily coffee breaks from work, grabbing lunch with the girls, or cocktails with friends who may, or may not, be business related. It may sound complicated, but if you can argue that there was substantial business conversation then go ahead and record it.
3) It can’t be deemed “lavish or extravagant”. There is nothing wrong with giving a client the 5 star treatment. Just know that you won’t necessarily be allowed to deduct every penny that you spend. If you could have ordered a regular Latte for $5 but decided to order the $20 limited edition Kopi Luwak Latte (cause you’re cool like that) The difference in price between the $20 latte and the $5 latte is not deductible.
4) You have a receipt for your Latte. Just snapping picture of the receipt on your phone and writing a quick note of where, who, and what the meal was about will satisfy the IRS record keeping rules. Of course, shoving it into a folder works too, just make sure you know where it’s hiding if the tax man ever inquires.
The 50% Rule
After you have met all the rules, and your Latte is indeed deductible…
The IRS will limit your total meal and entertainment deductions to 50%. this means that only $2.50 out the the $5 Latte will be deducted on your tax return. I wish I could explain why, but I am not an IRS agent so your guess is as good as mine.
There are exceptions to the 50% rule, but your better off assuming it applies until consulting with your tax preparer.
While meals and entertainment are a deductible expense in our businesses, don’t focus too much on them or get carried away spending your money “cause it’s deductible”. If that is your attitude towards deductions, your profit is not going to be where you want it to be. But please, enjoy your latte!
If you are curious to learn more about business deductions you can check out the IRS Small Business Center.
Hello there, I’m Melissa Whaley, owner of Whaley Bookkeeping. I specialize in virtual bookkeeping and tax preparation for entrepreneurs. It excites me to help people understand and take control of their finances, especially in their businesses. I believe that anyone is capable of success if their passions are accompanied with the right tools. I love working with new business owners to help them set-up systems that will take the stress out their finances.
I am a licensed tax preparer in the state of California and have been helping small business owners since 2009. I am a Wave Accounting Pro, Quickbooks Online ProAdvisor, and Freshbooks Bookkeeper.
You will often find me drinking a cup of coffee while hanging out in Facebook Groups, or on my YouTube channel making videos to help Etsy sellers with their bookkeeping. In my personal life I am married to a wonderful husband, have a 6 year old daughter and a 1 year old son.