Most of us regularly look for tax advantages that allow us to reduce our liability. When you’re self-employed, this can be an especially important move to make. There are a number of tax deductions you can take when you conduct business, but two that you might overlook are meals and entertainment.
Here’s what you need to know about deducting meals and entertainment on your taxes:
Before you get too excited about deducting the cost of your meals and entertainment, it’s important to make sure that you are truly conducting business. In order to take these deductions, you need to be involved in business.
With meals, you can deduct a portion of the cost when you travel for business, even if you are eating alone. If you are paying for someone else’s meal, you need to make sure that you conduct some type of business during the meal.
The same rule applies when you are hoping to deduct the cost of entertainment. The IRS tends to scrutinize your entertainment deductions, so make sure they are on the level. In order to be eligible, you need to conduct business during the event, or immediately before or after the event. I once finalized a deal during the intermission of an opera performance. Because business was the reason we were meeting, and because we concluded our business at the opera, I was able to deduct half the cost of my admission.
Your costs for meals and entertainment related to business are not fully deductible. You can only deduct 50% of the actual cost. For meals, there is an alternative, which is deducting 50% of the standard meal allowance. If your meal cost more than the allowance, you might be missing out if you don’t keep proper records of the business you engaged in during the meal.
Keep Good Records
It’s always good policy to keep good records when it comes to taxes. It’s especially true if you are taking advantage of some of these business deductions allowed by the IRS. Here are some tips for keeping good records if you want to deduct meals and entertainment:
- Keep your receipts: Good record keeping starts with documenting what you actually spent. Keep your receipts for entertainment and meals. You can still take half the standard meal allowance without a receipt. However, if you want to maximize your deduction when you have an expensive meal, you should keep the receipt.
- Note the details: Don’t forget to note the details of the business interaction. You should keep track of the time and place, and the business purpose. You should also note who you met, and what you talked about. I like to make my notes on the receipts so it’s all together and easily accessible.
- Know how it relates to the entertainment: You should be able to record why the entertainment is related to the business meeting. Did you choose a basketball game because a potential client loves basketball and you think this will soften him or her up? Are you catching a show with a potential business partner because s/he loves the theater and it’s a convenient place to meet? Make sure there is a connection.
With the right approach, you can make some of your meals and entertainment deductible on your taxes, reducing the real cost to you.