Substantiation of Meals and Entertainment Deduction: How Much Is Enough?
2/1/2016
Nora Tellifson, CPA
Meals and entertainment are a common business expense for many self-employed people and some employees. They are also one of the most frequently disallowed deductions on audits, and the primary reason for that is lack of written records or substantiation. There is also a 50% limitation on most meals and entertainment deductions—so if you spend $100, only $50 can be deducted. If you are going to take a meals and entertainment deduction, make sure that you understand the record keeping requirements.
Let’s take a look at meals first. A receipt is not required in all situations. If you are an employee who accounts for expenses to your employer under an accountable plan, and you use a per diem allowance method for meals, no receipt is required. If the expense is less than $75, a receipt is not required. Regardless of whether a receipt is required, adequate written evidence needs to be maintained that includes the following elements: name and location of the restaurant, date, amount, names of people present, and the business purpose. This information can be maintained in a written logbook, including an electronic one. I personally recommend that you keep all meals receipts because they already include most of the elements you need in your written record. You can add the names of attendees and business purpose to the receipt, and you have fulfilled your record keeping requirement. I’d also like to point out that a cancelled check is not an adequate record by itself—you need to include all of the elements listed above.
The requirements for entertainment expenses include all of the ones required for meals plus a couple more for the business purpose. It’s understood that if you go to a football game with a client, you are not going to be conducting business while you are at the game. In that case, your record should include where the business discussion took place before or after the entertainment, who was involved in the discussion, the duration, and the nature of the discussion.
Timely kept records are the best evidence for your deductions. That doesn’t mean you have to maintain your log daily—updating weekly or less frequently is still considered timely. The point is that your recollection is fresher the closer you are to the events. It’s also worth noting that there are a lot of great apps out there now so that you can track your expenses with your phone. You may also prefer to take a picture of the receipt with your phone and maintain those electronically. If you compile your records prior to filing your tax return, they are still considered to be contemporaneous, meaning that they were recorded in the same time period as the expenses. In the event of an audit, other types of evidence may be considered, but your timely and complete written record is your best defense.
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.
Nora Tellifson, CPA
Meals and entertainment are a common business expense for many self-employed people and some employees. They are also one of the most frequently disallowed deductions on audits, and the primary reason for that is lack of written records or substantiation. There is also a 50% limitation on most meals and entertainment deductions—so if you spend $100, only $50 can be deducted. If you are going to take a meals and entertainment deduction, make sure that you understand the record keeping requirements.
Let’s take a look at meals first. A receipt is not required in all situations. If you are an employee who accounts for expenses to your employer under an accountable plan, and you use a per diem allowance method for meals, no receipt is required. If the expense is less than $75, a receipt is not required. Regardless of whether a receipt is required, adequate written evidence needs to be maintained that includes the following elements: name and location of the restaurant, date, amount, names of people present, and the business purpose. This information can be maintained in a written logbook, including an electronic one. I personally recommend that you keep all meals receipts because they already include most of the elements you need in your written record. You can add the names of attendees and business purpose to the receipt, and you have fulfilled your record keeping requirement. I’d also like to point out that a cancelled check is not an adequate record by itself—you need to include all of the elements listed above.
The requirements for entertainment expenses include all of the ones required for meals plus a couple more for the business purpose. It’s understood that if you go to a football game with a client, you are not going to be conducting business while you are at the game. In that case, your record should include where the business discussion took place before or after the entertainment, who was involved in the discussion, the duration, and the nature of the discussion.
Timely kept records are the best evidence for your deductions. That doesn’t mean you have to maintain your log daily—updating weekly or less frequently is still considered timely. The point is that your recollection is fresher the closer you are to the events. It’s also worth noting that there are a lot of great apps out there now so that you can track your expenses with your phone. You may also prefer to take a picture of the receipt with your phone and maintain those electronically. If you compile your records prior to filing your tax return, they are still considered to be contemporaneous, meaning that they were recorded in the same time period as the expenses. In the event of an audit, other types of evidence may be considered, but your timely and complete written record is your best defense.
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.
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