Meals are probably one of the most popular and favored small business deductions. It allows you to take your clients out to a nice restaurant (that is not “lavish” or “extravagant”) while you negotiate yourself into future opportunities with them, and deduct 50% of the expense from your taxes. It’s a win-win.
However, after the tax changes this year which removed the ability to write off “entertainment” expenses, business meals are one of the only deductions left for pampering your clientele, so might as well take advantage… but only legitimately! You must think about the intent of the meal. Is it purely for entertainment, or is it really to discuss something for business?
The more meals you deduct, the more likely your business will be audited. This deduction is heavily abused, and one way to ensure an audit is to not have proper documentation, especially this year. So to keep your meals and permanently reduce your taxes, do not make these 3 mistakes:
1. The business meals do not satisfy the requirements for proper tax verification
If the documentation does not include the taxpayer’s business relationship with the other meal attendees, and/or did not record the business purpose of the meal(s), the deduction probably will not be accepted.
The cost and description should be added as notes with every receipt or business credit card statement. The meal description should include the following:
- Date
- Location
- Business purpose (the more detail, the better)
- Name and business relationship of everyone involved with the meal
Most of this info comes on the receipt if a copy is available. Simply add the rest of your notes to the back and add it to your records later.
2. The taxpayer was unable to provide legitimate information to tie the meals to business dealings
This can include copies of receipts, copies of checks if paying by check, or any other related documents pertaining to business dealings during the meals. When you do provide the correct information, ensure it is accurate and reliable.
As we become more digital, there will be fewer receipts. If you have the option to email a copy to yourself, this might be a quicker and more accurate method, as you could type the notes about the meeting right into the email with your phone, and take care of it at your convenience later. If paying with cash, definitely try to get a receipt. If this is not possible, make sure a very small amount of meals occur this way, and make sure your notes about the meeting are detailed.
3. Reconstructing meal expenses using your expense spreadsheet is not substantial enough
Even if your meal is completely legitimate, make sure your documentation is foolproof and makes sense throughout all of your records.
Remember, any corporate holiday parties and team building activities for boosting employee morale are still fully deductible. Organize your documents as you go, and you’ll be well-prepared for tax season and permanent business tax savings!
