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Tax Strategy: How to get 100% business entertainment tax deductions

Can you deduct 100% of business entertainment?

Saving money on taxes keeps money in your pocket.  Tax savings go directly to your bottom line.  The real estate business is a people business.  You can’t sit in your office and expect to meet clients, tenants, prospects, bankers, adjusters, appraisers and investors.  You are going to be out and about and you are going to eat.  The question is “Can I deduct 100% of my meal costs from my taxes?”  The simple answer is yes, if you follow the rules.  These tax rules are laid out in 26 CFR 1.274-2.  Don’t worry.  This article will explain it.

Business Entertainment Example

The short version says you can deduct your portion of the business entertainment meal if you have business reason to be there.  You must transact business with someone.  For example, you and Bob go to lunch and discussed the latest methods to get listings.  The tab is $30.  You pay your portion and Bob pays his.  You both deduct your amount of the lunch.  In this case, both you and Bob actively pursued future business.

Business Entertainment Rules

Let’s look at the rules.  There are two rules associated with the example above.

1)  The expenditure was directly related to conduct your trade or business.

2)  Either preceding or following the expenditure, there was a genuine business discussion.

How to document business entertainment expenses

As with any tax deduction, you must document that you met the requirements.  In the example above, you will get a copy of the receipt and note your portion of the meal.  You will write down who you transacted business with and what was discussed.  You do not need a long list of notes of the discussion.  Simply stating “discussed future business opportunities” will suffice.

Can you deduct your spouses meal?

A big investor is coming and you want to meet them.  Your husband is with you as you go out.  Can you deduct his meal as business entertainment?  Yes.  The states

The spouse of a person referred to in paragraph(c)(3)(iv) of this tax code will be considered closely connected to such a person for purposes of this subparagraph.

You must document who, what and where.  The expense must be for transacting business.   Good-will events do not meet the test.  You cannot take a group out for the night as a good will gesture and take a deduction.  You also cannot take a group a night club and expect to deduct it.  Nightclubs are loud and the IRS does not anticipate business discussions in such an environment.

Be sure you do not try to tax deduct taking your employee to lunch 5 days a week and deducting it.  The IRS will claim you are trying to offset normal living expenses.  Limit the number of times you take the same person out to less than 30 times per year.  Do not abuse the rule.  If you are deducting 300 meals per year, then you will raise a flag.   Remember, bulls get fed and hogs get slaughtered.

Tips to help you be audit ready

1 The expense must be directly related

  • You intend to do business at the time you spend the money
  • You discuss a topic that is intended to result in future business
  • The main reason you are there is do business
  • You spoke with person with whom you intend to do business

The expense occurs in an appropriate setting

  • The person you are with knows you want to conducting business
  • You spend the money in such a way to further your business
  •  This is not a meaningful social or personal meeting

It is a business setting

  • A nightclub or theater is not conducive for conducting business.  The business discussion can occur before or after the expense.  It must be documented.

Business entertainment can be 100% tax deductible when you learn and follow the rules.  If you found this article useful maybe you will enjoy

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This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

Cover photo from travelhelp-corporatehousing.com

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