Reconstructing an entire trip for an expense report can be an excruciating exercise if you haven’t conscientiously recorded all of your expenditures and kept all of your receipts.
But imagine doing that across the table from an IRS auditor. These professionals tend to be especially alert to discrepancies, absent documentation and rule-bending when it comes to the meal and entertainment deduction you claim on your income tax return.
The IRS is very clear on what is allowable and what’s not, but like most areas of the federal tax code, there are exceptions. You can learn these the hard way – by making a mistake – or take a QuickBooks class to expand your knowledge.
What You May Claim
You can deduct meals on your tax return if they occurred while you were out of town on a trip required by your company, or if the expenses were incurred while you were entertaining a client. In general, you can claim 50 percent of your unreimbursed costs for meals.
But what if you’re not reimbursed at all? If, for example, you’re self-employed? In that case, you can take that 50 percent off on your Schedule C. Other forms will be appropriate depending on the circumstances.
However, there are limits. The IRS does not allow you to claim meals that were, “lavish or extravagant.” A substantial bill or luxurious location won’t necessarily disqualify you, though. You also have the option to go with the federal government’s standard meal allowance, rather than the actual cost. This, too, is discussed in QuickBooks training courses.
Keep Meticulous Records
How does the IRS determine whether your meal-as-entertainment deduction was legitimate? Or if taking a client to an activity that provided entertainment, amusement or recreation can be claimed? There are two types of tests:
- The directly-related test. Did it occur in what was clearly a business setting? Was transacting business the primary purpose, and did you do so? Did you expect that your company would benefit as a result?
- The associated test. Was the entertainment related to your company’s trade? Did it occur right before or after a substantial business discussion?
Careful, accurate record-keeping, of course, is critical. The IRS suggests keeping your expenses for each trip (or single occurrence, if you don’t leave town) in, for example, an account book or log or diary of some sort. You will need receipts, cancelled checks and/or bills, and you should document the name and location of the establishment, the date(s), the rationale for the expense and who was present.
So start 2013 off right by resolving to maintain accurate, detailed records of your business-related meals and expenses. That’s the easy part. The hard part — understanding the myriad exceptions and ensuring that you’re in compliance – can be handled by participating in a good QuickBooks course.