Empowering Healthy Business: The Podcast for Small Business Owners
The Empowering Healthy Business Podcast is THE podcast for small business owners seeking to balance having a nicely profitable business, a sustainable, scalable, and salable business, lower stress levels, better work-life balance, and improved physical and emotional fitness. Yes, this is possible! Though it’s not easy. We’re here to help you navigate toward this objective.
Empowering Healthy Business: The Podcast for Small Business Owners
#39 Meals, Entertainment & Travel Tax Deduction Rules
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
This episode's topic is near and dear to many business owners. There are probably a lot of misconceptions about it. There's a lot of gray area about it. Just because the business spends money on something doesn't necessarily mean it is tax-deductible on the tax returns. There are documentation, compliance considerations. Greg Reed, CPA joins the show to discuss the tax deductibility of:
- Meals
- Entertainment
- Travel
Greg can be reached at smartbookstax.com or greed@smartbookstax.com.
Thanks for listening!
Host Cal Wilder can be reached at:
cal@empoweringhealthybusiness.com
https://www.linkedin.com/in/calvinwilder/
Hey Greg, welcome back to the podcast.
Greg:Thanks for having me.
Calvin:So, today's topic I think is gonna be near and dear to, many business owners. There are probably a lot of misconceptions about it. There's a lot of gray area about it. There's documentation, compliance considerations, right? You know, today we're gonna talk about meals, entertainment and travel tax deduction rules. Just because the business spends money on something doesn't necessarily mean it is tax deductible on the tax returns. So we're gonna dig in and you're gonna help us understand what's the deal with meals, entertainment and travel tax deductions.
Greg:I feel like this is just one of those topics that like a lot of people just don't get right, or they get partly right. It can get sloppy and if the IRS comes in, it can be a, big red flag for you and your business.
Calvin:So maybe we can tackle these in, kind of, some overlap here and gray area of what constitutes travel versus meals versus entertainment and things like that. But maybe we can just talk about meals initially and then move on to entertainment and then travel, if that works for you.
Greg:You got it. Yeah. So meals is probably the most popular one here. You know, because not every business owner's gonna travel for work but, I think more often than not, you're gonna have some form of like, meals that's related to the business. So generally speaking meals are 50% deductible. Now there's three criteria that make it deductible. It's a legitimate business discussion during the meeting right. It's not lavish or extravagant and, you or your employee is present in the meeting. So this can apply to client lunches and dinners, meals while traveling or, during trainings. So for example, last year I was in San Diego, or in January I was in San Diego. All my meals were 50% deductible because that was for a, Certified Tax coach training.
Calvin:So let's say, the business owner goes to lunch or dinner with an employee or a client or, somebody associated with the business, an outside advisor maybe. You know, they talk about business, they talk about personal stuff, family stuff, like are there standards. Around kinda what percent of the meeting needs to be business focused, for it to be deductible.
Greg:As long as you're talking about business and the reason for the meeting is for business, then it's deductible. I mean, we're not gonna like split hairs here and neither is the IRS. the key here is to document, you know, who, what and why. So the old school rule is, grab the receipt after and write, who was in the meeting, what was discussed, and you know, the purpose of the meeting. I doubt people are doing that. You can also use your Google Calendar because that would alsobe sufficient. And I guess pro tip, I think you can put notes in your Google Calendar. Maybe when you get back to your office, you put in a note, who was there, what was discussed, and, maybe the purpose of the meeting. But the key here is documentation. That's what the IRS is gonna want to see and honestly, they're just gonna cherry pick things. You show them a few documents where, you've documented all this stuff, they're not gonna keep going and digging through everything.
Calvin:I mean, dollars at stake here are relatively smaller. I, this isn't, you know.
Greg:Unless your business is, if you're in the business of client entertainment, so like a banker who's like taking clients out and, you know, entertaining people.
Calvin:Yeah. Calvin: If you're a salesperson and, you go eat a meal with somebody five days a week, Then the dollars can get pretty big.
Greg:You're, Yeah Yeah you're wheeling and dealing and that number becomes a pretty big line item.
Calvin:What about, spouses that run a business together? do you have any advice for how, or how much or how frequently, they can deduct meal expenses where they talk about business.
Greg:Again, it has to be about the business purpose of the meeting. And so if you feel like you need a once a week meeting with your spouse, who's also your business partner to, have a discussion, then that could qualify. Again, it has to be a legitimate discussion and have a legitimate reason behind it. It can't be lavish or extravagant, anything like that.
Calvin:How would you define or How would the IRS more importantly define lavish and extravagant?
Greg:I believe there might actually be like a, Diminus rule on this, but in general, you know. If you're buying the $500 bottle of wine or something that would be considered extravagant and lavish, but, a standard, steak and maybe a one drink that's totally in the wheelhouse of what the IRS considers normal
Calvin:And meals are only 50% deductible. So what if you get like takeout, you go back to the office, or you stock the fridge in the office, or you're not actually eating at the restaurant, but you're eating at the office. How does that work?
Greg:Yeah, great question. so this actually pops up a lot in tax firms. meals that are for the benefit of the employer. So maybe like late nights during tax season when your employer just wants you working 80 hours a week. those are all gonna be a hundred percent deductible. Office snacks, coffee, those are gonna be a hundred percent deductible. company holiday parties or team building events, those are also all a hundred percent deductible. I think it's important when you're putting in these expenses to note what that was for and make sure that you're putting it under the right line item just so that you are getting, because I know a holiday party could get pretty expensive.
Calvin:So it seems like if you're just purely trying to maximize tax deductibility, it's a lot better to get takeout and eat at the office than, to go out and eat at a restaurant somewhere.
Greg:Again, there has to be a,reason for it. Like it has to be for the convenience of the employer. If you are just going out to get lunch and bringing it back to the office, that's not necessarily a deductible expense at all, really, because in the IRS's eyes. you still get to eat, right? But if you're going out to get lunch with a client, and maybe you're bringing it back to the office and you're meeting with them in your, conference room. That would be deductible. Yeah 50% deductible.
Calvin:Okay. And you talked a little bit about documentation and receipts. I know when I go to eat, I have kind of two receipts. I have the receipt that I sign, which just has the total amount that I'm paying on my credit card. And then I have the itemized receipt that sows everything I bought at the restaurant. So are you supposed to keep the itemized receipts or just the overall total receipt or both?
Greg:Well I think you leave the receipt that you sign there right. And then they usually, they give you the two copies and you would take back that receipt, which I don't know if that's the itemized one or not. But I mean, obviously I think the itemized one's probably gonna be better because that's gonna show, you know, maybe you bought like two dinners, two drinks. It's a little bit more comprehensive other than, you know, The IRS doesn't know if you just have one with $1 amount on it, how many people were there, if it's a $300 dinner and it was just you.
Calvin:I mean, I guess if you're spending $300 on a meal, you probably want to have the itemized receipt to back up. Why that's legitimate. But if you spend $30 on a meal, it's probably less important.
Greg:Yeah. You get all those fancy steaks or something just for you then,
Calvin:Okay. is there anything else regarding meals that we need to talk about?
Greg:You know, So I thought this was relevant and I think when this podcast posts the holiday will have passed, but there's plenty of other holidays, in the future. This is just like a, fun fact, but if you have like a cookout or something, July 4th is in a couple of days. And maybe you've got some clients coming to that party, you know, maybe you got 10 people coming in, two of them are clients. you could deduct 20% of the food that you're serving there.
Calvin:Good to know. And then moving on to entertainment. If I'm remembering right, entertainment is not deductible. Is that still the case? I know this, the whole meals and entertainment deductibility has changed over the last several years. What's the current status of entertainment?
Greg:So unfortunately back in 2018, and,for those of us who play golf, this was a big hit. because you know, you used to say, oh, well, this is a client meeting on the golf course, and you get to deduct your 18 hole round of golf but in 2018 they did away with that and now entertainment is not deductible at all. sporting events, tickets, golf, trying to think what the other big entertainment pieces might be. But, none of that is deductible anymore.
Calvin:So practically speaking, seems like if you're kind of combining meals and entertainment in some kind of an event, you always give the example of going to a baseball game and buying a ticket and a hot dog, right? You wanna itemize that out so you can deduct the hot dog potentially, but not the ticket.
Greg:Yeah, if you go to a Red Sox game now, I think the hot dog and the beer is gonna be more expensive than the tickets. So, I think that's probably gonna benefit the people more. if you're gonna go to a Red Sox game, and you get club seats and everything's included in that one price of the ticket, then nothing is deductible. But if you go to the Red Sox game, you can break out your ticket and maybe there's a meal before the game, and then you have a burger and a hotdog or something and a beer. During the game, you're talking about business, that is all 50% deductible. Not the ticket, but the food.
Calvin:So the takeaway is itemized as much as possible so you can at least deduct half the cost of meals.
Greg:Yeah, exactly. it all comes down to documentation and just taking those few extra minutes each month to break out, what might be entertainment and what might be, so this comes also is important for the chart of counts, right?I still see people having like a meals and entertainment line item. It's important that now you have a meals line item. ideally you have like a 50% meals line item, a hundred percent meals line item, and an entertainment line item.
Calvin:Usually I'm a big fan and advocate of shorter chart of accounts rather than longer chart of accounts, but this is an example of a situation where having a couple extra accounts can save you money on taxes.
Greg:Because really at the end of the year, I can't go through and audit your meals and entertainment line item, and chances are, even if I did, I'm not gonna get it right.
Calvin:Because all you're gonna see is you know the vendor name and the amount and the GL account and QuickBooks. You don't know what it really was, right?
Greg:Exactly. Yeah. So it doesn't help you any, and it's hard for me. So I think the benefit here is that at the end of the year, I can say, okay, that's 50%. That's a hundred percent. And that's not deductible at all.
Calvin:Alright. Before we move on to travel, is there anything else regarding entertainment we should discuss?
Greg:I think that's it.
Calvin:All right so entertainment, short and sweet, trying to minimize your entertainment expenses. 'cause it's not tax deductible.
Greg:Not tax deductible. Maybe someday, again, maybe they'll bring it back, but
Calvin:All right, travel. So travel can incorporate a lot of different things. What's the deal with travel.
Greg:Travel. You could go down a whole rabbit hole. So high level, you know, flights, trains, rental cars, ride shares, hotels. This would be a great way to stay, I guess. But an Airbnb, baggage fees, wifi conference fees, mileage if you're, renting a car, if you're using your own car. So if like you're traveling overnight, you know, outside of like your normal area of business, that is all deductible for like the travel. Now you can still deduct your mileage and this is a little bit different topic, but you know, if you're traveling, to a client site, for work or something like that in your own car too.
Calvin:So back to our chart of accounts discussion. I like having one travel line, unless you can explain to me why you really need multiple travel GL accounts. 'cause sometimes I start working with a new client and I see, you know, lodging, airfare, taxi, parking, like all the different ways you could possibly travel, have their own GL account.
Greg:I'd put it all under one travel, and then maybe you have like a reimbursed mileage account for your kind of local miles where you're traveling to a client site.
Calvin:Okay. Cool. And then, what about meals while traveling?
Greg:Those are 50% deductible.
Calvin:Only 50%.
Greg:Yep.
Calvin:I guess the IRS thinks you have to eat anyway.
Greg:Yeah, no, that's kind of the idea is that you're gonna eat anyways. But they give you the 50% if you're kind of outside of that area where it makes sense that you'd have to get a meal, right?
Calvin:Has that changed in the last several years? or has it always been 50%?
Greg:It's always been 50%.
Calvin:Okay. Cool.
Greg:I think some people try to sneak in a hundred percent.
Calvin:Yep. You book the meal to the travel line and the CPA might not notice.
Greg:It is always been 50%. and it always has to be, like I said because the employee is far enough away that it impacts them like, you can't be, driving 10 miles to a client site and, be like oh well, it is lunchtime. So I guess my meals are 50% deductible right now. you have to be maybe traveling like 200 miles to, a client in, you know, we're in Massachusetts, so maybe you're going up to Maine or something.
Calvin:So let's talk about these, kind of combination travel where you go into a conference, you're visiting a client, you're doing something legitimately for your business, but you add on a couple extra days. Maybe you bring a spouse or your kids and, have a couple days of leisure activity, before or after your business or in between your business activity. How is that is that deductible
Greg:Yeah, it's a great way to get some vacation time while also getting some deductions for it. So high level, if the primary purpose of the trip is business, then there is some deductibility there, if the primary trip. Is personal then, it's gonna be less deductible. So for example, let's say you're flying somewhere, the round trip airfare, if it's the primary purposes for business, is gonna be deductible. if you're flying somewhere and it's not necessarily for business, and it's primarily for personal. Maybe like, you know, you meet some guy on, the beach when you guys have too many, rum drinks or something. You guys start talking about business. But, the primary business reason for the whole trip is personal that airfare is not deductible.
Calvin:So basically the Fitch costs of getting to and from the location are deductible as long as the purpose of the trip was business.
Greg:Yep. Hotel. So for the nights that you're there for business, then those are gonna be deductible. The nights that you are not there for business, those are obviously not gonna be deductible. So, you know, if you're going to do like a two day conference, but you're there for a week, then the days that you're not in the conference are obviously not deductible.
Calvin:So, documentation seems critical here. To substantiate, you know, how many days of days of the trip for
Greg:It all comes down to documentation.
Calvin:And that's like the last thing the business owners wanna do is fill out documentation, right? I sympathize, but it definitely protects you to spend a little extra time doing that documentation.
Greg:Oh, absolutely. but, you know, a little work around here. So if you fly in on Friday for a meeting and then you also have a meeting on Monday, then your weekend is considered business And that is actually deductible. Now it's gotta be legit, right?
Calvin:But if you fly in on a Monday and you fly out on a Friday. that doesn't count. Like Wednesday, Thursday for personal stuff doesn't count
Greg:no, Greg: that, that doesn't count.
Calvin:but but the weekend does.
Greg:If you're gonna fly out, fly in on a Friday, meet with your client, you know, maybe you're doing an inventory count, like if you're an auditor, right? I always go back to like tax stuff because it's what I know. But like your Friday, you're doing an inventory count. But you also have to do another inventory count on Monday at another location. The weekend's technically deductible. You know, that includes your lodging, your meals, all that stuff is deductible. Now again, there's gotta be a legitimate reason. if you're just flying in for a two hour meeting on Friday and you're like, well, hey client, let's grab a coffee on Monday so I can make my weekend deductible. IRS might frown on that.
Calvin:Okay.
Greg:Now what if you wanna bring your family because you're there Friday and you have a meeting on Monday, but now you've got Saturday and Sunday and you wanna bring your family with you right? if their employees, then that would be deductible. If there's a business reason for, bringing them along that would make them deductible or if it's ordinary and necessary. So, I always say like, Hey, hire your kids. I don't know if they would actually have a business reason for traveling, but maybe they do. If your spouse is your partner, again, this is a great opportunity to maybe you and your spouse get a weekend away and it's deductible.You gotta kind of look at every situation with a grain of salt and see, how can we use the rules to our advantage.
Calvin:I think we could probably do a whole other episode on childcare and child related deductibility and ways to compensate them at a low tax rate and everything. So maybe we'll do another episode this summer on childcare related tax issues,
Greg:it's a good time of the year for that.
Calvin:especially now they're outta school. You gotta keep 'em occupied so you can you can work.
Greg:We're, we're fighting for our lives over here it's, it's been an interesting week with the kids. The camps haven't started quite yet, Yep. but, Cool. Greg: Yeah, so it's a great way to kind of use the rules to your advantage. get some deductions. Also, if your spouse is your business partner, you need to do a quarterly, offsite meeting to, talk about business and your quarterly goals, yearly goals, whatever that could constitute as a deductible expense. And it happens to be your spouse. So, Could be a win-win for everyone right.
Calvin:All right, so we covered meals, entertainment, and travel. Anything else you wanna mention on these topics before we wrap up.
Greg:You know, again, at the end of the day it comes down to documentation. I think that's the key here. And also, I see this a lot but, You can't be deducting like your lunch every day or like your coffee's at Dunkin's every day or like, you know, I see a lot of, like, landscape companies will every day you see the Dunking Donuts line item and it's like, oh yeah, no, I wish but, the IRS isn't gonna let you take that deduction.
Calvin:Yeah, I mean, if we think from an 80 20 perspective, if you are the business owner, the last thing you wanna do is fill out expense reports and things like that. You know, like you said earlier, Greg, annotating with your pen on a receipt, the business purpose of the meal and who attended goes a long way. And no business owners really wanna fill out an Expensify expense report every month. But if there are expenses that you know, it's really risk reward, right? You wanna get the tax deduction, spend a little bit of time doing the documentation to substantiate it.
Greg:I mean, no one wants to do maintenance on their cars either, but if you don't do maintenance on your car, then you're gonna end up not having your car for as long. If you don't do the maintenance on your business and fill out the expense reports, then you are gonna have a bigger tax bill at the end of the year.
Calvin:Awesome. Well, thanks Greg. Really appreciate your time. If folks wanna reach out to you directly with questions about their business or their taxes, what's the best way for them to do that?
Greg:You can book a meeting with me directly on my website, SmartBookstax.com. or you can, just shoot me an email, greed@smartbookstax.com.
Calvin:Great. Well thanks for the time today, Greg. Look forward to having you back on. Greg: All right, looking forward to it. Thanks a lot.
Host:The reference show notes and find other episodes on empoweringhealthybusiness.com. If you would like to have a one-on-one discussion with me. Or possibly engage SmartBooks to help with your business. You can reach me at Cal cal@empoweringhealthybusiness.com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for small business owners signing off.
