Deducting Entertainment Expenses
 

In the 11 years Cole Martin, Ltd. has been in business, it seems that some issues never change or go away. Audits of individuals and businesses have decreased dramatically, but when we do encounter an audit, the question raised by the IRS remains the same. Is the taxpayer’s method of accounting appropriate? Also, does the taxpayer have adequate supporting documentation for the meals and entertainment deduction?

Under the IRS meals and entertainment rules, a taxpayer cannot take a deduction for the cost of entertainment unless that cost is either “directly related” to the active conduct of a trade or business, or “associated with” the active conduct of a trade or business.

For an expense to qualify as “directly related” to your business, it must do either of the following: involve an active discussion aimed at getting revenue (or other business benefit), or occur in a clear business setting. Also, the discussion must be the principal purpose of the combined activity.

To be considered “associated with” the active conduct of business, the entertainment must directly precede or follow a substantial and bona fide business discussion. It is much easier to qualify an entertainment expense under this part of the rule.

Even when entertainment expenses follow these rules, they are still only 50% deductible. Also, all of the expenses must be appropriately documented and supported by a receipt copy, named participants and the nature of the business or discussion.

If you have questions on this or any other tax related issues, please contact Bill Martin at (847)850-5270, ext. 222, or email bmartin@colemartin.net.
 

847.850.5270          847.850.5271 - fax
1532 Barclay Boulevard, Buffalo Grove, IL 60089