Most business people who incur expenses relating to “entertaining” clients are familiar with the phrase “T&E” (travel and entertainment). However, for income tax purposes, the proper phrase should be “M&E” (meals and entertainment). That is because while business travel is generally fully deductible to the business or to the individual incurring the expense, meals and entertainment are generally only 50% deductible. In addition, M&E expenditures must meet certain tests in order to be deductible at all.
First of all, the M&E expenditures must be “ordinary and necessary”. As long as it is reasonable in your business to entertain clients or other business people and the expenditure is not extravagant, this test will be met easily. Secondly, the M&E expenditures must be either directly related or associated with the business. “Directly related” means that there must be an active business discussion aimed at getting immediate revenue. This means that the discussion cannot be just a general goodwill meeting or a personal meeting. Also, the meeting must take place in a clear business setting. However, if you don’t meet the directly related test, you may be able to meet the “associated with” test. This happens when the meal/entertainment event occurs on the same day as a bona fide business discussion. Therefore, you can deduct goodwill M&E expenditures held in a social setting, if its purpose is to get new business or encourage the continuation of a business relationship.
In addition, M&E expenditures must be substantiated. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. For expenses of $75 or more, receipts are required.
We can help you maximize your deductions for business meals and entertainment expenditures. If you have any questions about these rules, please contact Andrew Ross, CPA of Bedard, Kurowicki & Co., CPA’s at (908) 782-7900 or firstname.lastname@example.org.