Can I deduct meals and entertainment expenses?
Expenses for meals and entertainment expenses can be deducted as miscellaneous deductions if a strict test is met. This test requires that the expenses be ordinary and necessary to your business and that they be either: (i) directly related to your business; or (ii) that the meal or entertainment took place right before or after a substantial business discussion. Thus, you can take your clients, or potential clients, on a business dinner or to a sports event, and as long as there is a substantial business discussion before or after the meal/event, you can deduct the cost.
The requirement that the meal or entertainment be “directly related” to your business can be met in one of three ways. First, if there is a business motive for the meal or entertainment, and business activity takes place during the meal or entertainment, it is considered directly related to your business. Second, a meal or entertainment is considered directly related to your business if it took place somewhere which is a clear business setting. Finally, if the meal or entertainment was for the benefit of an individual as a taxable compensation or award, it is directly related to your business.
In addition to the above, you may be able to deduct entertaining for the purpose of business goodwill. For example, if you spend the day conducting business negotiations with others and then take those individuals out for dinner to promote goodwill, you can deduct the costs of those meals. Similarly, you can deduct the cost of business gifts, up to $25 per gift.
All of these meal and entertainment deductions are included in the miscellaneous deductions and are therefore subject to the 2% floor (collectively with all other miscellaneous deductions).