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Business Meals and Entertainment Expenses & Club Dues
Many of our clients have questions regarding the requirements for deducting meals and entertainment expenses. This issue also comes up during income tax audits.
Business meals and entertainment expenses must be directly related to or associated with the active conduct of a trade or business in order to be deductible for income tax purposes. They cannot be lavish or extravagant.
Business meals and entertainment expenses must be substantiated by documenting the amount spent, the time and place, the business purpose and the business relationship to the parties involved.
Once an expenditure for meals and entertainment qualifies as a business expense, it is only 50% deductible. The following are exceptions to the 50% limit and are 100% deductible as long as they meet the other requirements:
- Food and beverages furnished on the business premises of the taxpayer primarily for their employees.
- Expenses for recreational, social or similar activities primarily for the benefit of employees (other than highly compensated employees). Examples include: holiday parties, picnics, group meals for employees and their guests (no customers allowed).
- Any amounts included in the W-2 of the employee as income.
A similar issue that also comes up under audit is the deductibility of club dues.
Dues paid to a club organized for business, pleasure, recreation or other social purposes are generally nondeductible. This disallowance rule includes dues for country clubs, golf clubs, business luncheon clubs, athletic clubs, and even airline and hotel clubs. However, you can deduct 50% of the cost of otherwise allowable business entertainment at a club, even if the dues you pay to the club are nondeductible. For example, if you have dinner with a client at your country club after a substantial and bona fide business discussion, 50% of the cost of the dinner is deductible as a business expense.
The club-dues disallowance rule generally does not affect dues paid to professional organizations including bar associations and medical associations or civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs. The dues paid to local business leagues, chambers of commerce and boards of trade also are not affected. However, an organization is not exempt from the disallowance rule if its principal purpose is to provide entertainment facilities to its members or to conduct entertainment activities for them.
If you have any questions regarding these issues, please contact an SVA professional.