As a business owner, there may be times throughout the year when you want to show appreciation for your clients. Scheduling a business lunch or dinner together can be a great way to treat them and celebrate your working relationship. Plus, when you understand the tax code, you might be able to deduct the expense of that meal from your business tax return. Here’s what to know.
The Tax Code for Business Meals with Clients
Whether you’re self-employed, running a company and managing a team, or just starting a side gig, the tax code has specific rules for how to handle your business income and business expenses—and it’s not always clear cut!
It used to be that both entertainment and business meals with clients were deductible. But today, entertainment costs are no longer deductible. The 50 percent meal deduction still remains, though, so as a small business owner, it’s important to understand the importance of that classification.
Maybe you have a tradition of taking your best customers out to a basketball game and dinner during the holidays. In the past, you might have been able to deduct half of those costs on your business tax return. Now, though, the sporting tickets will not be deductible. And the meal will only be considered deductible if it relates to a specific business purpose.
Social events are a no-go for taking this deduction, which means it’s up to the business owner to set the expectations for what their guests should expect for business meals vs leisure time.
Keeping Records of Your Meals and Expenses
The option to sit down and discuss business over a meal definitely has its appeal. After all, we all need to eat; and meeting in a neutral location, rather than one party’s office, can help spark collaboration in a more personable way.
Meeting up for meals is a great strategy for building stronger connections with clients and other professionals in our lives. The key for business owners is to document these interactions. If you use meals to talk through business decisions, future goals, or ongoing projects, then you should be safe to take the deduction. Keeping those records up-to-date throughout the tax year can help you track the expenses and make sure nothing gets overlooked when it comes time to file.
Just like any business expense, you need to keep organized records for your business meals if you plan to count them as a deduction. Include the date, address, and time of your meeting in your business log, along with the name and professional title of each attendee. Then you can write up a short description of the specific purpose of your meeting.
For this, it often helps to think in terms of your bottom line. Sure, you might make a point to chat through business “trends” over lunch, but what’s the real impact of that business lunch or company dinner? If you’re audited under the new rules, you want to have all of those details squared away in advance!
As always, the team at NSO & Company can provide you with further guidance and help you make informed decisions with all your business expenses. Feel free to contact us and we’d be happy to help you.