Ah, the expense-account life! The chance to get the IRS to help pay for your meals, your nights on the town, your travel to wondrous and exotic places. That's the image often associated with tax write-offs for travel and entertainment expenses. And it's accurate, as long as you can show that the costs involved are necessary to conduct your business.
See the topics below for more information.
Things aren't as sweet as they once were, however. These days, only 50% of the cost of your business meals and entertainment can be written off. In theory, you get at least some personal benefit from those business meals and good times. So, the argument goes, you should bear at least part of the cost without help from your fellow taxpayers.
If you're self-employed, you total up what you spent during the year on qualifying meals and entertainment and cut the total in half to arrive at your business deduction. Employees who are not reimbursed for their business meals and entertainment expenses are hit with a double whammy. Not only is 50% of the cost nondeductible, but even the deductible portion is treated as a miscellaneous itemized deduction. Such expenses are deductible only to the extent that all your miscellaneous expenses exceed 2% of your adjusted gross income.
Several years ago, Congress called a halt to the so-called quiet business meal. Before the change, the cost of taking a customer or other business contact out to eat could be deducted even if not a word of business was discussed. Say you took a client out to dinner to maintain a relationship that might pay off in business down the road but didn't have any specific deal in mind at the time. The cost could still qualify as a deduction as long as it was associated with your business. Now to earn a deduction business must be discussed during or immediately before or after the meal.
This same rule applies to business entertainment expenses, such as a night at the theater or a sports event. Although you don't have to try to close a specific business deal in the midst of a sudden-death overtime, the law requires you to talk turkey before or after the game to establish that the entertainment was associated with the conduct of your business.
What about annual dues you pay to belong to a country club or athletic club, for example, where you entertain business contacts? Here, too, there's been a costly crackdown. No longer are such dues deductible and Congress made it clear that the ban applies to dues for all sorts of clubs, including business luncheon, social, athletic, sporting and airline clubs. Some club dues remain deductible though, as long as the primary purpose of the club is not entertainment. Types of groups whose dues are deductible: Chambers of commerce, business leagues, boards of trades and civic and public service outfits such as Kiwanis, Lions, Rotary, etc.
The IRS won't support ticket scalpers. The law limits the deduction for tickets to entertainment events, including plays, sports events and concerts, to 50% of the face value of the tickets. If you have to pay extra for the choice seats needed to impress a client, for example, the added cost is a nondeductible personal expense.
To put more teeth in the general requirement that only "ordinary and necessary" business expenses be deducted, the law lowers the boom on taxpayers who lease skyboxes or other luxury seats at sports arenas. If you use a skybox for business entertainment, you can deduct only 50% of the cost of the highest priced non-luxury seats available. This crackdown applies only if you lease the skybox for more than one event. The full cost—subject to the 50% rule—can survive as a business write-off if you rent the box only once a year.