December 19, 2016
Many businesses incur costs on wining and dining clients—especially at holiday time. You might be tempted to think that this is an easy tax deduction, but this is not always the case. Here are the rules you need to know to optimize these types of deductions.
First, only 50% of your meal expense is deductible. If you hold a customer lunch that includes a business-related discussion, you can only deduct 50% of the cost.
To be treated as a deductible cost at 50%, the meal must be directly related to the conduct of your business or the meal must directly precede or follow a substantial business discussion. So taking your clients out for a nice holiday lunch after a regular business meeting would be fine in this case.
Second, standard meal allowance rates can ease recordkeeping. Having difficulty keeping records and receipts for meals when out of town on business. You can just deduct a standard meal allowance. It may be less than your actual meal costs, but you won’t need receipts. If you have employees who travel on business, you may want to use the standard rate to reimburse them for their meal costs out of town. For 2016, the standard meal and incidentals allowance is usually $68 per day within the continental United States. It’s higher in New Yok City, San Francisco and other high-cost locations, including some resort areas. The U.S. General Services Administration publishes the daily standard rates by state. Using this rate does not relieve you of the responsibility to keep a record of the time, place and business purpose of the trip.
Third, records are required. When you claim a deductible meal, you need certain records to back up your claims. Technically no deduction can be claimed without these records, although there are some limited exceptions. The IRS looks closely at deductions for meal costs because of the potential for abuse. If your tax return is questioned, the IRS will ask to see records stating when, where and why you had the meal. You don’t need receipts for meals costing less than $75.
There are a number of apps for your smartphone that can assist you, allowing you to input the date, location, details and take a photo or scan the receipt—making record keeping easier.
Forth, holiday parties are 100 % deductible. If you hold a party for your staff in your facility or at a restaurant, you can deduct all of the costs. As long as the party is for the benefit of all employees, you can write off 100% of your costs.
As we’ve outlined here, the tax law has specific rules and limitations that curtail or prevent businesses from deducting meal costs that seem like they would be legitimate write offs. If you have any questions please contact our office at 844-484-8881 to make sure you’re in compliance with tax rules.