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Small Business Deductions: Meals and Entertainment

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Two Restrictive Tests for Meals and Entertainment Expenses

Directly-related test
Associated test

A) Directly related test:

The directly related test for dining and entertainment costs may be met in one of three ways:

Under the generally related test
As expenses incurred in a clear business setting
As expenses incurred for services performed.

1) The generally related test:

You don't have to prove that income or some other business benefit occurred.
You must be able to show a business motive for the dining or entertainment.
You must be able to prove that any of the following occurred:
- a business meeting,
- a business negotiation, or
- a business decision
Devoting more time to business than to entertainment is not necessary.
If no business was discussed, be able to show that you would have discussed business but did not because of reasons beyond your control.
You had more than a general expectation of getting future income or some other specific business benefit. In other words, you did not incur the expense just for goodwill purposes.

2) As expenses incurred in a clear business setting.

You'll meet this test provided your only motive for incurring the expenses was for the furtherance of your business.
The people being entertained in a clear business setting are usually people with whom you have no personal or social relationship. This could involve giving a free dinner to a customer who regularly attends your hotel.

3) As expenses incurred for services performed.

If an expense is directly or indirectly made for the benefit of an individual (other than an employee)

You will also meet the directly related test if you entertain people with whom you have no personal or social relationship and the entertainment is done in a clear business setting.

Example:

You have a grand opening and invite a few civic leaders in your community to attend in order to get publicity.

The directly-related test for entertainment generally will not be met if:

You are not present during the entertainment.
The distractions are substantial. For example, at night clubs, sporting events, or during a social event, the noise level may be too high to allow for a business discussion.
If you meet with a group at a cocktail lounge, country club, athletic clubs, or vacation resorts.

If you entertain client or customers on hunting or fishing trips or on a yacht, you must be able to prove that there was a business purpose.

If the directly related test is not met, dining and entertainment expenses may still qualify for a deduction if the associated test is met.

Meals and Entertainment Expenses: The Associated Test

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Small Business Deductions: Meals and Entertainment

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Two Restrictive Tests for Meals and Entertainment Expenses

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