Dasmah Accounting

Let’s do lunch

Posted on July 27, 2010

Everyone likes a free lunch but if you are counting on the IRS to give you one, you need to think again.  One of the questions that we hear every year is concerning meals and entertainment on tax returns, especially for businesses.  Most business owners are aware of the 50% limitation, but they are not always clear on what constitutes a business lunch.  What they normally fail to take into consideration is the “Directly Related Test”.  There are three important parts of the test: 1) taxpayer must have more than a general expectation of deriving income or 2) some other specific business benefit and 3) active business conduct must be engaged in and also be the principal conduct aspect of the meal.  I also want to add one other item and that is: expenses of employees’, stockholders’, agents’ or directors’ business meetings.  Keep in mind that there is usually a 50% limitation on the deduction.

Let’s try to simplify things a little bit by just answering some questions that we are frequently asked:

1)    I work in a large metro area and travel from client to client.   Are my meals a deduction?–  No, this would not pass the directly related test.

2)    Same question is number 1, but I have an employee with me.–  If you make this a habit, I would say no.  How many business meetings do you need a week, especially over lunch?  dasmah Accounting does have lunch business meetings, but they only happen about once every couple of months and I can honestly say the main conversation is business.

3)    What if I take one of my existing clients out for lunch?–  Yes, this would be covered. The meal is to help maintain the business relationship that you have with the client and thus your expectation of additional income in the future.

I think that the best advice is just use common sense and not try to skate around an issue that could cause you more grief if you were ever audited.  Think like an auditor.  If the person being audited tried to cheat on this, it raises red flags to the auditor on how many other items might be subject to fraud.

We have some other tax subjects that we have been asked about: home office expense, non-cash contributions, and mileage.  We will try to get to these in the coming weeks.  If you have a question, please send it to us and we will get you an answer, even if it is not the one you want to hear.