By Rieva Lesonsky
When it comes to entertaining business clients your reaction may be “No, problem, I’ll just write it off.” But let’s say you’re taking your client fishing? Can you make the case that your precious working capital was spent fishing for business purposes? Not necessarily. Or are you trying to dazzle a potential investor in order to secure some much-needed seed capital? The IRS has very clear tests to determine what expenses can be applied toward a tax deduction and the clear recordkeeping rules you need to follow.
First, an entertainment expense must meet one of two tests:
- The Directly-related Test: The main purpose of the entertainment was to conduct business; business was, in fact, conducted; and you expect that the activity would result in income for the business.
- The Associated Test: The expense is associated with the active conduct of your business and occurred directly before or after a substantial business discussion. For example, if the expense was made with a clear business purpose, like to get new business or secure the relationship with a current customer. Also, if the expense happened on the same day as the business discussion, the expense is then considered relevant to your business.
And how much of the expense can you deduct? In general, you can only deduct 50 percent of your business-related meal and entertainment expenses. This includes entertainment expenses that occur while you’re traveling, attending conventions, in your place of business or at a club. Also included are the taxes and tips related to the entertainment expense, cover charges for clubs, rent on rooms you secured for a meeting and parking. Not subject to the 50 percent limit is the cost of transportation to and from a business meal or a business-related entertainment activity.
To make sure you are in compliance with the IRS recordkeeping requirement keep detailed records of your expenses, including and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. Keep receipts, cancelled checks and bills organized in a log book or accounting software system. Don’t worry about keeping up with this on a daily basis. As long as you keep fairly current on your expenses paperwork, you shouldn’t run into any problems if you’re ever questioned by the tax man.
Rieva Lesonsky is CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship. Email Rieva at email@example.com, follow her on Google+ and Twitter.com/Rieva and visit her website, SmallBizDaily.com, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports