In general, you can deduct only 50% of your business-related meal and entertainment expenses. (If you are subject to the Department of Transportation's "hours of service" limits, you can deduct a higher percentage. See Individuals subject to "hours of service" limits, later.)

The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed.

Figure A summarizes the general rules explained in this section.

The 50% limit applies to business meals or entertainment expenses you have while:

1. Traveling away from home (whether eating alone or with others) on business,
2. Entertaining customers at your place of business, a restaurant, or other location, or
3. Attending a business convention or reception, business meeting, or business luncheon at a club.

Included expenses. Expenses subject to the 50% limit include:

1. Taxes and tips relating to a business meal or entertainment activity,
2. Cover charges for admission to a nightclub,
3. Rent paid for a room in which you hold a dinner or cocktail party, and
4. Amounts paid for parking at a sports arena.

However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit.

Application of 50% limit. The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later.

The 50% limit also applies to certain meal and entertainment expenses that are not business related. It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. It also applies to the cost of meals included in deductible educational expenses.

When to apply the 50% limit. You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication.

Example 1. 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. Your deduction cannot be more than $30 (.50 × $60).

Example 2. You purchase two tickets to a concert and give them to a client. You purchased the tickets through a ticket agent. You paid $150 for the two tickets, which had a face value of $60 each ($120 total). Your deduction cannot be more than $60 (.50 × $120).

Exceptions to the 50% Limit

Generally, business-related meal and entertainment expenses are subject to the 50% limit. Figure A can help you determine if the 50% limit applies to you.

Expenses not subject to 50% limit. Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions.

1 - Employee's reimbursed expenses. If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Accountable plans are discussed in chapter 6.

2 - Self-employed. If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all three of the following requirements are met.

1. You have these expenses as an independent contractor.
2. Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.
3. You provide adequate records of these expenses to your customer or client. (See chapter 5.)

In this case, your client or customer is subject to the 50% limit on the expenses.

Example. You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. If the client can deduct the expenses, the client is subject to the 50% limit.

If you (the contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit.

3 - Advertising expenses. You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit.

4 - Sale of meals or entertainment. You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is subject to the 50% limit.

5 - Charitable sports event. You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under Entertainment tickets, earlier.

Individuals subject to "hours of service" limits. You can deduct a higher percentage of your meal expenses if the meals take place during or incident to any period subject to the Department of Transportation's "hours of service" limits. The percentage is 60% for 2001, and it gradually increases to 80% by the year 2008.

Individuals subject to the Department of Transportation's "hours of service" limits include the following persons.

1. Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
2. Interstate truck operators and bus drivers who are under Department of Transportation regulations.
3. Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations.
4. Certain merchant mariners who are under Coast Guard regulations.

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