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Picking up the tab... Is the meal (or drinks) a deductible business expense?

Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided.

Meals sold in the normal course of your business aren’t considered entertainment.

Deduction may depend on your type of business. Your kind of business may determine if a particular activity is considered entertainment. For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally isn’t considered entertainment. This is because fashion shows are typical in your business. But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment.

Separating costs.

If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. You must have a reasonable basis for making this allocation. For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge.

Taking turns paying for meals or entertainment. If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense.

Lavish or extravagant expenses.

You can’t deduct expenses for entertainment that are lavish or extravagant. An expense isn’t considered lavish or extravagant if it is reasonable considering the facts and circumstances. Expenses won’t be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.

Allocating between business and nonbusiness.

If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. You can deduct only the business part. If you can’t establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis.

https://www.irs.gov/publications/p463#en_US_2017_publink100033880

steve@stevesimsea.com