How to deduct more of your personal meals entertainment?

If you are like most people, you are not deducting business meals and entertainment. When I look at clients personal expenditures, I either see a lot of meals and entertainment that were not deducted through the business or I see very few meals and entertainment. Some clients get in the habit of using cash. Other clients fail to take the one minute of time to use the business credit card and to document the business meal or entertainment.

It is interesting that many of the court cases where taxpayers lose are CPAs!

For example, In Fitch v Commr., TC Memo 2012-358, Fitch got in the habit of deducting all of he and his wife’s meals. Possibly you have heard the story about the pig and the hog. The pig gets fat but the hog gets slaughtered.

Fitch was a “hog” because he and his wife’s meal expenses were ALL deducted.

And Fitch was lazy and did not document the business purpose of the meal.

I learn a lot from tax court cases. So, does the IRS. When Fitch had a business meal with someone other than themselves AND the name of the person and business purpose was noted on the credit card slip, the court gave the “thumbs up” win to the Fitchs’. What does that tell you?

Conscientiously schedule meals and entertainment with people who you could sell your product or service to or who is a vendor who will help you be more profitable in selling your product or service!

Also, if your revenues are just $200,000, trying to deduct $80,000 of meals and entertainment is excessive and hoggy!

Yes, the Fitchs’ tried to deduct hundreds of meals together. They were together for almost all of the meals and entertainment. And they hand hundreds of meal together. The IRS and the Tax Court require a business purpose. The Fitchs’ could have discussed business at their office or their home without having to try to deduct meals and entertainment.

The court stated that the Fitches “did not meet their burden of proving that the spousal meals were ordinary and necessary business expenses.”

But could the Fitchs’ have deducted meals and entertainment when the two of them were present?

I think that this is problematic since meals and entertainment are assumed to be personal and it is our job to prove that there was a business purpose.

There are other reasons besides business purpose that the Fitchs’ should have ‘broken bread” with other individuals who could help them increase their revenues or decrease their expenses. This is called the “ordinary and necessary test”.

The number one reason is that building rapport and bonding with clients or customers will help increase the profitability and cash flow of their businesses.

The number two reason is that they would not have had the extreme stress of an IRS audit.

The number three reason is that there have been tests that show that mentally as we age, we rejuvenate our brains through social interaction.

I have read that you should consider writing a quick business memo that includes key information such as why you had the meeting with your spouse, what information you gained from the meeting or hoped to gain, names of referrals obtained, and any business strategies you plan to pursue based on the conversations with your spouse. Then staple this extra memo to the receipt, and store the information in an indestructible place where you can retrieve it.

I do not agree with this position because you could have had the same meeting at your office or home.

The reason the unrelated person business meal and entertainment work so well is because bonding and rapport are part of all successful sales systems.

So, my recommendation as a tax savings CPA is to avoid a fight with the IRS by including at a meal or entertainment a business associate such as a client, a prospect or a “center of influence”. In my case, this would be an attorney or banker. To avoid the fight with the IRS in the first place, invite a client, prospect, or business associate to join you and your spouse at the meal.

If you spouse attends, you can deduct your spouse’s meal or entertainment as long as you write down the business purpose and who you spent time with at the time of the event.

© 2014 Jeffrey I. Brooks, CPA

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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