Wednesday, August 4, 2010

Q&A: Business Expenses and Tax Deductions

Question: A friend of mine recently told me that he deducts most of his meals with his family because he is self-employed and his wife helps him out with his business. Thus, any of these meals are deductible because they discuss some business while eating. Is this true?

Joe B, Phoenix, AZ

Answer: No, this is definitely not true and is certainly not recommended. In order to deduct your business meals, you must make sure that your business discussion is both “substantial” and “bona fide.” Your friend would fail both of these tests. First, while there are no rules telling you how much time during the meal you must discuss business matters (i.e. it does not need to be a majority of the time), you must be sure that the business discussion is the primary purpose of having the meal. This does not mean that you cannot have a relationship with the person being entertained, but you had better have a valid business relationship with the person before you try to claim any tax deductions. In addition, the IRS would most certainly argue successfully that the primary purpose of your meal was not business related. When you entertain family members, you may be able to show a legitimate business purpose, although this will certainly be more difficult than someone who was not related to you. You should be sure to remember these rules, as it is up to you to prove that you are entitled to deduct the entertainment expenses as legitimate business expenses.

No comments:

Post a Comment