I love enchiladas. I have worked in several Mexican restaurants over the years and you would think that I would grow tired of the cuisine but I have not. Unfortunately, I don’t get out much to take clients to meetings. Being virtual limits those activities. If you take clients or business associates out for a meal, here are some guidelines to know if you are considering deducting the expense on your tax return.
First, the meal needs to be for business-related purposes. When you take a client out for a yummy chicken enchilada, the intention of the meeting should be for future sales or other business benefits. The same holds true for employees, the meal needs to be for business and not just personal reasons. If you are the boss and you casually ask an employee to lunch, that is not deductible and the same holds true for clients.
Second, the meal needs to be ordinary and necessary. If you are in sales it is probably commonplace to take a client to dinner. This is an ordinary and accepted expense for others in your trade or profession. If you run a tow truck company you probably don’t take your clients out for a nice shrimp enchilada (that would make breaking down a little easier to swallow though). I think you get the idea. A necessary expense means that it is helpful and appropriate for your type of business.
Third, the deductions for meals are limited to 50% of the total bill. If you go out and spend $30 on a couple of organic spinach and portobello enchiladas you will only get to deduct $15 on your tax return. So, do you pay $15 less in taxes? That would be a good deal but the answer is no. The $15 reduces your taxable income, not your tax liability. The savings depends on your specific tax situation but you can think about the savings this way. If you have a marginal tax rate of say 30.75%, (25% for federal and 5.75% for state), then you will save 30.75% of $15 or $4.61. Your marginal tax rate is the % that your next earned $1 will be taxed at. (Ask your tax advisor for help on this). Not a bad savings but taking the client out is taking $25.39 out of your pocket so make sure you budget this expense wisely.
Lastly, there is record-keeping (don’t fall asleep or skip this section if you have gotten this far, this is the important piece that brings together the whole enchilada!). Keeping good records is a crucial task to substantiate your meal expenses and to manage your business wisely. The IRS requires that you record the amount, time, place, business purpose, and business relationship of the people present. When you keep the receipt for your meal, the first three are already documented. Writing the business purpose and those present on the receipt will give you a complete record. To make record-keeping easy you can take a picture using the Xero app on your smartphone! These are the minimum requirements for keeping records but it is important to also think about being a mature business owner and getting the most out of your investment in the meal. If you take clients out to lunch you may also want to keep a record of your conversation in some type of CRM (Customer Relationship Management software) or at the least on your calendar. You are going to need to know how much of an investment you are making in the client and if you should continue to pursue the relationship. You need to keep good documentation on the meeting so you can follow up at a later date. Having good documentation is helpful for tax purposes but is also a sign of a mature, successful business owner.
So, the next time you need to take out a business associate, keep these guidelines in mind. Have fun running your business and hopefully with a little luck, and some good business decisions, you will have the whole enchilada!! (I couldn’t resist)
Disclaimer: These are some of the basics for deducting that super yummy enchilada (meals) as a business expense and by no means a comprehensive discussion on the topic. It will give you a starting point. You should always consult your tax advisor on tax matters to ensure you are in compliance.