Publication 911 |
2000 Tax Year |
Meals & Entertainment
Because you are in the selling business, you may take business
associates to lunch or otherwise entertain them. The cost can be a
deductible business expense. However, certain conditions must be met
before you can take a deduction for business meals and entertainment,
and you generally can only deduct 50% of the cost. This section
discusses those rules.
Meals.
Include as meals the amounts spent on food and beverages and the
taxes and tips on those amounts. Generally, no deduction is allowed
unless you or your employee is present when the food or beverages are
provided.
Entertainment.
Include as entertainment any activity generally considered to
provide entertainment, amusement, or recreation. This includes
entertaining guests at nightclubs; social, athletic, and sporting
clubs; theaters; sporting events; on yachts; and on hunting, fishing,
and vacation trips or on similar outings. It can also include meeting
your customers personal, living, or family needs, such as furnishing a
hotel suite or a car. However, see Not directly related,
later.
Directly Related
or Associated
To be deductible, meal and entertainment expenses must be ordinary
and necessary expenses of carrying on your direct-selling business and
you must be able to prove them as explained later under Proving
Your Deductions. Unless certain exceptions apply, you must be
able to show that they are "directly related" to or "associated"
with the active conduct of your business.
For more information, see chapter 2 of Publication 463.
Directly related.
For meal and entertainment expenses to meet the directly-related
test, all the following must apply.
- You had more than a general expectation of getting income or
some other specific business benefit from the expense.
- You engaged in business with the person during the meal or
entertainment period.
- The main purpose of the combined business and meal or
entertainment was the active conduct of business.
You do not have to show that business income or another business
benefit actually resulted from each entertainment expense.
It is not necessary to devote more time to business than to the
meal or entertainment. However, if the business discussion is only
incidental to the meal or entertainment, it does not qualify as
directly related.
Example.
You are a direct seller of women's cosmetics. A state women's
organization is holding its annual convention in a local hotel and you
decide to display your products in a hospitality room in the hotel.
You also provide entertainment and give out product samples. You can
deduct the cost of the hospitality room and entertainment provided.
Not directly related.
Generally, expenses are not directly related if you are not there,
or there are substantial distractions that prevent you from actively
conducting business. The following are situations where there are
substantial distractions.
- A meeting or discussion at a nightclub, theater, or sporting
event.
- A meeting or discussion during what is essentially a social
gathering, such as a cocktail party.
- A meeting with a group that includes persons who are not
business associates at places such as cocktail lounges, country clubs,
golf clubs, athletic clubs, or vacation resorts.
You may prove the meal or entertainment is directly related by
clearly establishing you had a substantial business discussion during
the meal or entertainment.
When meals and entertainment take place on a hunting or fishing
trip, or on a yacht or pleasure boat, the conduct of business is not
considered the main reason for the combined business and entertainment
unless you clearly show otherwise.
Associated.
You can deduct meal and entertainment expenses that do not meet the
directly-related test if both the following apply.
- The expenses are associated with your direct-selling
business.
- The meal or entertainment is directly before or after a
substantial business discussion.
An ordinary and necessary meal or entertainment expense is
generally associated with your direct-selling business if you can show
you had a clear business purpose for the expense. The purpose may be
to get new business or to encourage the continuation of an existing
business relationship.
Substantial business discussion.
Whether a business discussion is substantial depends upon the facts
and circumstances in each case. You must show that you actively
engaged in a discussion, meeting, negotiation, or other business
transaction to get income for your business or another specific
business benefit.
The meeting does not have to be for a specified length of time.
However, you must show that the business discussion was substantial in
relation to the meal or entertainment. It is not necessary to devote
more time to business than to the meal or entertainment and you do not
have to discuss business during the meal or entertainment.
Business and nonbusiness guests.
You must divide your entertainment expenses between business and
nonbusiness expenses. Deduct only the business part. If you cannot
establish the part of the expense for each person participating, you
can allocate the expense to each participant on a pro-rata basis. For
example, if you entertain a group of 11 (including
yourself)-three business prospects and seven social
guests-deduct only four-elevenths of the expense.
Expenses for spouses.
You generally cannot deduct the cost of entertainment for your
spouse or for the spouse of a business customer. However, you can
deduct these costs if you can show that you had a clear business
purpose, rather than a personal or social purpose, for providing the
entertainment.
Example.
You entertain a business customer. The cost is an ordinary and
necessary business expense and is allowed under the entertainment
rules. The customer's spouse joins you because it is impractical to
entertain the customer without the spouse. You can deduct the cost of
entertaining the customer's spouse as an ordinary and necessary
business expense. Furthermore, if your spouse joins the party because
the customer's spouse is present, the cost of the entertainment for
your spouse is also an ordinary and necessary business expense.
Lavish or extravagant expenses.
You cannot deduct expenses for meals and entertainment to the
extent they are lavish or extravagant. An expense is not considered
lavish or extravagant if it is reasonable considering the facts and
circumstances. Expenses will not be disallowed merely because they are
more than a fixed dollar amount or take place at a deluxe restaurant,
hotel, nightclub, or resort.
Your meals.
Generally, you can deduct your business meal expenses while
traveling away from home for business (other than lavish or
extravagant amounts). However, if you entertain a business customer
locally and the conditions discussed earlier are met, the cost of your
own meal is deductible only to the extent the cost exceeds the amount
you would normally have spent for personal purposes.
Limit
You can usually deduct only 50% of your unreimbursed
business-related meal and entertainment expenses. The 50% limit
applies, for example, to expenses you incur while traveling away from
home on business (whether eating alone or with others), entertaining
business customers at your place of business or a restaurant, or
attending a business function, convention, or reception.
Taxes and tips related to a business meal or entertainment activity
are included in the amount subject to the 50% limit. Expenses such as
cover charges to a nightclub, rent for a room where you hold a dinner
or cocktail party, or the amount paid for parking at a sports arena
are subject to the 50% limit. However, the cost of transportation to
and from a business meal or entertainment activity that is otherwise
allowable is not subject to the 50% limit.
If you pay or have an expense for goods and services consisting of
meals, entertainment, and other services (such as lodging or
transportation), you must make a reasonable allocation of that expense
between the cost of meals and entertainment and the cost of other
services. For example, you must make an allocation if a hotel includes
one or more meals in its room charge.
Apply the 50% limit after figuring the amount that would otherwise
qualify for a deduction. First determine the amount of meal and
entertainment expenses that would be deductible under the rules
discussed earlier. Then apply the 50% limit to figure the deductible
amount.
Example.
You spend $100 for a business-related meal. If $40 of that amount
is not allowable because it is lavish and extravagant, the remaining
$60 is subject to the 50% limit. You cannot deduct more than $30 (50%
of $60).
Exceptions to the 50% limit are discussed in Publication 463.
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