That’s something you might say to a client or business associate. Not only are you taking care of business, you’re entitled to a tax discount on the tab. Reason: The IRS allows you to deduct 50 percent of your business meal expenses subject to record-keeping requirements.
Strategy: Schedule your meals to coincide with . If you follow the tax rules carefully, you can convert some nondeductible meal expenses into deductible ones.
Two basic types of deductible meal expenses exist:
1. “Directly related” meals. For a meal to qualify as a direct expense, you:
• Must have arranged the meal for business reasons.
• Must discuss business during the meal.
• Must have more than a general expectation that the cost of the meal will generate a business benefit. Taking out a client just for goodwill purposes isn’t enough, even though it’s “good for business.”
2. “Associated-with” meals. That means the meal must follow or precede a substantial business discussion. You’re under no time restraint, but the discussion and meal must be business-related when viewed together. So, you can’t spend one minute discussing business and follow it up with a deductible two-hour lunch.
By scheduling business meals properly, you can maximize your deductions. Arrange meals so they relate directly to or associated with your business.
Example 1: You’re negotiating with a client for an annual contract. On Wednesday, you wrap up the deal.
To show your appreciation, you and your spouse treat the client and his wife to dinner on Friday at a top restaurant. The tab for the four of you, including drinks and tip, comes to $500.
As things stand now, you gain no deduction for your meal expenses. But you can convert the cost into a deductible expense by changing things slightly.
Say you met with the client on Friday to finalize the deal and sign the papers. Then, you can deduct 50 percent of the cost of the meal on Friday night, even though the spouses tagged along purely for social reasons.
Example 2: You travel out of state to woo a potential client. When you make your initial pitch, you dine by yourself and drive home at night. Then, you drive back the next week to finish the negotiations. This time, you stay overnight and take the client out to dinner.
In that scenario, the cost of only the second meal qualifies for a write-off. But you can deduct 50 percent of both meals if you treat the client to dinner on your day trip, (because the meal is associated with your business), then treat the meal on your overnight stay as a business travel expense.