There are certain things businesses must keep in mind when deducting meals and entertainment expenditures. While there are often several questions posed to us, the two most common include:
- What is deductible?
- What do I need to keep in terms of records?
Meals and Entertainment Expenditures
Generally, to qualify as a deduction, an expenditure must meet all of the following criteria:
- It must not be lavish or extravagant. Consider: Is it reasonable given the facts and circumstances?
- The taxpayer or taxpayer’s employee must be present when the meals are furnished or the entertainment occurs.
- The expenditures must be “ordinary and necessary.” Consider: Is it customary in your industry to entertain clients, customers, vendors, or associates?
- The expenditure needs to be directly related to or associated with the taxpayer’s business. Consider: Was there a benefit gained by the expense? Were you enhancing a business relationship or creating new ones?
The IRS states that in order to deduct entertainment expenses, you must be able to prove (substantiate) certain elements of the expense. If your business is selected for an IRS audit, and you are unable to produce the required documentary evidence, the entire expense amount can be disallowed and deemed not deductible for tax purposes. Documentary evidence is used as proof and is defined by the IRS as “receipts, cancelled checks, or bills” that support the expense and “shows the amount, date, place, and essential character of the expense.”
Whether you are taking a client or vendor to dinner, a sports outing, or concert, it should be expensed only if the following information is included on the receipt:
- The amount of the expense
- The time and place of the expense
- The business purpose of the expense
- The business relationship to the taxpayer of the individuals being entertained
The IRS also states that included with the substantiation there must be a quick note regarding items discussed, for example:
- It can be as simple as “Meeting for Q3 purchases” or
- A more detailed explanation, such as “Relationship building with J. Doe at Media Group, discussion on potential synergies.”
Travel Expenses
When it is necessary to send an employee out of town overnight for business purposes, it is imperative complete records be kept for all related expenses. Items related to out of town travel include:
- Boarding passes
- Baggage receipts
- Hotel receipts
- Rental vehicle receipt
- Taxi/limousine receipts
- Parking receipts
- Meal receipts
Again, as stated above when documenting these expenses, it is very important to include a business purpose or synopsis of the travel.
At times it is necessary for employees to travel locally to vendors, customers, or clients. In order for the deduction of travel expenses to be deducted by the business upon reimbursement, a log of the travel details needs to be kept. Items the travel log should include are:
- Date of travel
- Destination (city, town, or area)
- Business purpose
- Odometer readings (beginning, ending, and total miles for the trip)
- Related expenses (tolls or gasoline)
As a reminder, when computing mileage reimbursements, the standard mileage rate for business miles driven is $0.56 per mile for 2014 and $0.575 per mile for 2015.
Do I have to document “Even the little stuff?”
The IRS does not require receipts, canceled checks, credit card slips, or other documentation for entertainment, meals, or certain travel expenses that cost less than $75. However, you must still document the facts listed above. This exemption does not apply to lodging. Any hotel costs when traveling for business need to have corresponding receipts, even if the expense is less than $75.
In Summary: Please be aware that the IRS revenue agents continue to be very aggressive during tax return audits and strictly enforce these substantiation requirements. It is always better to err on the side of too much documentation versus not enough. If you have any additional questions about the requirements, please contact our office at 248.208.8860.
