Tax tip # 3: Meals and entertainment
January 11, 2016

Meals are the most common business expense. Talk about small-business ownership with your friends, and there will likely be many jokes about power lunches and client dinners. However, according Entrepreneur, meal expenses are exceptionally scrutinized by the Internal Revenue Service due to the high potential for abuse. Thus, it's important for business owners to make sure they have the facts straight regarding meal and entertainment deductions .

What counts as a business meal
Eric Levenhagen, a strategist at ProWise Tax & Accounting in Mason City, Iowa, explained to Entrepreneur that there is no rule for what percentage of a meal must be taken up by business talk. What's important is that the event led to something that furthers the business such as a client lead or service referral. Companies can also deduct the expense of a meal if it is directly before or after a business discussion.

The IRS states that typically, businesses can deduct up to 50 percent of related meal and entertainment expenses. Owners and employees can deduct up to 50 percent when dining out as a result of being away for business, but they must actually be out of town and not just a simple distance from work. This rule does not apply to independent interstate truckers and others with limited hours of service imposed by the Department of Transportation. Such workers can deduct up to 80 percent of meal costs away from home.

The cost of a business meal must be reasonable, but that doesn't mean it can't be grand. It's okay to host high-end clients at top-tier restaurants so long as such an expense is normal or reasonable for the client. Loopholelewy.com used the example of holding a dinner at the Waldorf Astoria when the client is staying at that hotel. For such a guest, a meal at the Waldorf isn't extravagant.

Keeping records
No matter what the specifics of the meal and entertainment were, businesses must record the cost, location and reason for the meal. Receipts are necessary only of the meal was worth more than $75. Businesses can also use the standard meal allowance rate for their state, but this does not absolve them of recording the meal's purpose, time and location. A small business accounting software product will make keeping records much easier.

Business meals are a standard way of making connections and establishing new clients. Let Sage help keep your expenses in order this tax season.

Nexus: G-WEBCD5