If you’re a sole proprietor, you can deduct ordinary and necessary business meals and entertainment expenses. However, these expenses must be directly related to or associated with your business. If you’re an employee, you can deduct these only to the extent your employer doesn’t reimburse you.
Entertainment includes an activity that provides:
- Recreation, including meals you bought your customer or client
To meet the directly-related requirement, you must show all of these:
- The main purpose of the entertainment was the conduct of business.
- You engaged in business during the entertainment period.
- You expected to get income or some other business benefit.
Your expense might not meet the directly-related requirement. If so, you might be able to deduct a meal or entertainment expense if you can meet the associated test. This test requires both of these to be true:
- The expense is associated with the active conduct of a trade or business. So, the expense must have a clear business purpose, like:
- Getting new business
- Encouraging the continuation of an existing business relationship
- You discuss a substantial amount of business before, during, or after the meal or entertainment.
The expenses can’t be lavish or extravagant. Your deduction is usually limited to 50% of the expenses. You can fully deduct the cost of business gifts up to a maximum of $25 per client per year if they’re:
- Ordinary and necessary to your business
- Given to current or prospective clients
Tickets to shows or sporting events you give to clients to promote business are deductible. If you accompany your client to the event, you can deduct the cost of the tickets as an entertainment expense. If you don’t accompany your client, you can deduct the cost as an entertainment expense or as a gift. Choose whichever gives you the larger deduction.
You can also deduct the cost of your meal and your client’s meal if you meet all of the requirements. You usually can’t deduct the cost of entertainment for your spouse or for your customer’s spouse. However, you can deduct these costs if you can show you had a clear business purpose for providing the entertainment. A personal or social purpose doesn’t qualify.
You can’t deduct more than the face value of an entertainment ticket, even if you paid a higher price.
Dues to business or professional organizations that promote your business are also deductible. However, you can’t deduct expenses for club dues, like those you pay to:
- Country clubs
- Social clubs
- Athletic clubs
- Airline clubs
Your meal and entertainment expense records should include:
- Documentary evidence, like:
- Canceled checks
- Cost of each meal or entertainment expense. You can add together incidental expenses (Ex: cab fares and phone calls) and record the total on a daily basis.
- Date meal or entertainment took place
- Name, location, and type of meal or entertainment — like dinner or theater
- Reason for meal or entertainment, which includes:
- Business benefit you got from entertaining your client
- Brief summary of business discussion that took place
- Name(s), and occupations(s) of the people you entertained or dined with