There is lots of confusion among small businesses about how to handle accounting for entertainment, meals at the office, business promotions and expenses for meals while traveling.  And there should be given that all of this is explained by the IRS in no less than 50 pages of instruction covering multitudes of possibilities in IRS Pub 463, “Travel, Entertainment, Gift, and Car Expenses”.  So we’ll cover the very basics here, targeted to small businesses that want a quick-read on what to do.

Business Meals and Entertainment

Perhaps the most frequent deduction in this area is when a business pays for the food, beverages and entertainment of a current or potential customer or employee.  The deduction must be supported with an expense receipt (or bank/credit card statement charge) along with records showing the date of the event, who attended, the business purpose (what was discussed before, during, or directly after the event), and all associated costs.

This is often kept in expense reports submitted to the business, but each event may just as easily be entered directly into QuickBooks, usually through accounts such as “Meals and Entertainment,” (aka “Business Promotions”).

Only 50% of these costs may be deducted.  For example, if you take a sales prospect to a sports event (2 tickets x $90) and dinner (2 x $80 including food, beverages, tax and tip), the total expense is $180 + $160 = $340, however only 50% of this ($170) is a tax deduction.  In QuickBooks, the full amount is usually entered, and then reduced 50% when P&L line amounts are entered into a tax program such as Intuit ProConnect Tax Online.  Note that the expense is allowable even if no business is generated.

Some expenses may be 80% deductible (for air crews and such) in situations subject to the Department of Transportation’s “hours of service” limits.  This is also discussed in IRS Pub 463.

In all cases at least two people are needed for this type of event to qualify as a tax-deductible expense — no deduction is allowed if it’s just you, however, instead consider the “Meals While Traveling” scenario below.

Meals While Traveling

Business owners, officers and representatives frequently travel to obtain business or for operational purposes, and these travel expenses are 100% deductible.  Traveling for purposes such as continuing education, industry conferences, seminars, and trade shows are also valid business activities.

The entire cost of the bill should be included when calculating the expense, including food, beverages, sales tax, and gratuities.  And don’t forget to included business mileage to and from the event, any tolls, fees and parking.

But what qualifies as travel?  Some consider this as a meal on the way home from a client across town, which will not pass muster with the IRS.  So only take this deduction if you are truly out of town.  The IRS defines this as when business takes the taxpayer outside of the general area where business or operations are normally conducted, and even with this there are limits on the number of meals that may be expensed as “Meals While Traveling” (yes, it’s a bit unclear).

To qualify as a business trip, the travel duration must also be significantly longer than a normal day of work and rest or sleep would be needed to safely make the return trip.  For these reasons, same-day trips usually don’t qualify as a 100% “Meals While Traveling” deduction, but may well qualify for the 50% “Business Meals and Entertainment” category.

In any version of QuickBooks (including QB Enterprise, Pro, Premier, QB Online and QB Self Employed) these expense accounts are included in the normal, pre-packaged chart of accounts, or may be added or edited at any time.

Company Events are 100% Deductible

Many companies have events for all or part of their staff, such as company-wide meetings.  These meal expenses are 100% deductible.  For example, the IRS allows firms to deduct 100% of the cost of occasional inside lunches, small snacks and meals that are part of an event for the benefit of employees. The iconic coffee-and-donuts set up in the conference room is a classic example.  Interestingly, if the same event is held at a restaurant, the deduction is only 50% – on a much larger tab.  Full meals hosted to assist in working through a special project (“we’ve got to get this proposal out tonight”) are also 100% deductible, however this must be for special situations and not continuous.  If these meals are routinely offered, the IRS may consider this as simply a perc that should be added to regular compensation.

Advertising Expenses

When companies sponsor meals, entertainment, or recreational facilities to the general public to promote products, services or as a means of generating goodwill in the community, this is usually considered as a form of advertising which is 100% deductible.  An example may be if snacks and cold beverages are provided as part of sponsoring a local little league team.

Sale of Meals or Entertainment

What about organizations that actually sell meals and entertainment?  In this case the 50% limit does not apply, and although all food, beverage and entertainment expenses are 100% deductible, this is put against the associated revenues to figure a taxable gain or loss.  A company cafeteria may be an example of this – all expenses are deductible but revenues from sales to employees are included as part of the firm’s sales.

Charitable Events

One interesting way to get the 100% deduction instead of 50% is to package the event as a deal that includes food, beverages and a ticket to an IRS-qualified charitable event.  This is allowable even if the ticket is for a small price, and, ahem, not everyone goes to the event after the festivities.

In Summary

Travel, meals, entertainment, and promotional expenses are deductible if the event is for a business purpose as shown in entries where the expense deduction is taken, or on supporting expense reports (often a spreadsheet these days, or in many QuickBooks add-on apps).  All versions of QuickBooks can easily handle this, and only a small amount of customization may be required to properly name these accounts for each situation.  QuickBooks Online even allows expense receipts (such as pdf’s) to be attached to particular entries which could possibly same large amounts of time.  The tax guidelines and requirements are mind-numbingly complex.  IRS Pub 463, “Travel, Entertainment, Gift, and Car Expenses should be referenced (vs read from page 1 through 50) to know the full story and the latest practices on these popular business deductions.