Generally, you’re entitled to deduct 50% of the cost of the meals and entertainment incurred for valid business reasons. However, as a new case shows, you must meet strict substantiation requirements.
In a recent case the taxpayer and owner of a company that recruits foreign workers for seasonal jobs in the U.S., deducted almost $25,000 in meal and entertainment expense in 2010. He provided copies of receipts and a schedule summarizing the contents of the receipts. The receipts included his handwritten statements where he sometimes indicated the business purpose of expenditures and identities of the individuals being entertained.
The IRS conceded that the taxpayer substantiated expenses for about half of the expenses he deducted, but he failed to substantiate the others.
To qualify for deductions, you must:
- show the amount of the expense
- the time and place of the entertainment or expense
- the business purpose of the entertainment or expense
- and the business relationship of those being entertained
The Tax Court pointed out three holes in the taxpayer’s case
1. Many of the receipts appeared to be for personal expenses -- e.g. he included numerous receipts for single cups of coffee that he consumed by himself; and receipts for meals that he actually shared with his wife. The expenses generally don’t relate to any legitimate business purpose.
2. Many of the receipts were illegible. The Court was unable to determine the amount, time and/or place of each expenditure.
3. Many of the handwritten notations on the receipts didn’t indicate the business relationship between the taxpayer and the person being entertained.
Therefore, the Tax Court concluded that the taxpayer’s allowable deductions were limited to the amount conceded by the IRS.
NOTE: Keep detailed contemporaneous records of meal and entertainment expense.