Not having worked in a fancy business world where I would be in on such secrets, is it true that people can “write off” on their taxes business lunches? Hww does that work?
Separate question: What is the policy justification for that? (Not interested in a debate on the merits of the idea, just wondering where the idea came from or what its supposed to be related to, assuming that was once true or still is true).
Did you have a particular staff report in mind? I can’t think of a relevant one at the moment.
Or is this in the wrong forum?
Many businesses are not just about exchanging goods and services, they are relationships.
Esp when you are talking about arrangements where thousands if not millions of dollars over several years may change hands, trust becomes a major issue. Someone you have spent time with in a social situation rather than just a sales pitch., is often seen as more trustworthy.
Any business expense can be deducted provided it is “ordinary and necessary” to further your business. Business lunches qualify because they are considered “helpful and appropriate” in advancing business goals. Btw, these words are taken right from the tax code, so don’t blame me if they are vague and misleading (IRS publication 535).
My husband has many business lunches and dinners with clients (as did I when I was working). If it weren’t for the business, he would not be hanging out dining with these people, so it is a legitimate business expense.
Moved from Comments on Staff Reports to General Questions.
**Gfactor **
General Questions Moderator
Here’s an article:
http://accounting.smartpros.com/x44532.xml
and see the discussion beginning on page 9 here: http://www.irs.gov/pub/irs-pdf/p463.pdf
Wrong forum. Sorry.
The answer is yes, but it depends on who is writing it off.
If your company pays for the lunch, they write it off, not you. I believe you only get to write off 50% of the lunch, by the way. If you are a freelancer, say, you write it off. It usually makes sense to make it a business expense in schedule C.
Not just lunch, but dinner also - or even breakfast. Having meals with a customer does build relationships.
You don’t have to be all that fancy. There are two ways it can work. Under certain circumstances an employee can request reimbursement of expenses for having a meeting over a meal, or providing entertainment for a client or other employees. In this case it is the company that ultimately pays, and can treat it as a business expense. (I am trying to be vague because I don’t know all the particulars about what’s allowed by the IRS.) This is somewhat dependent on company policy, not just the tax code, because such expenses generally come right out of profit. For a lot of business, as mentioned, developing relationships with clients is well worth the cost of buying them dinner once in a while. I have also been on the receiving end of this kind of thing. (I now do business with the federal government and we are prohibited from even buying our client a drink.)
I am not as clear on situations where you pay out of your own pocket, unless you run a S-corporation or are otherwise self-employed. The 1040 has a category for unreimbursed employee expenses, where you spend money on something for your job but your employer won’t reimburse you.
I hope an expert will come in with details, but over the past few years a threshold for this has sprung up. I used to be able to deduct things like organization memberships and mileage to meetings, but now this has gone to 0. I do grant reviewing for the government in which my hotel comes out of a per diem, and lately I’ve had to do a schedule C to be able to deduct hotel and meal expenses.
Just to make it clear, there is a common misconception that writing something off means it is free or even close to it. It just means that the business gets a tax discount on certain expenses like business entertaining. That isn’t that huge of a discount and they still have to pay for most of it.
Effectively you end up getting about 25-35% off because of tax recapture but yes, free it ain’t.
As a freelancer, it just means that you get to deduct the cost of the meal from your income. How much that is depends on your tax bracket.
Any money you spend that helps you create income is deductable. For instance, I can deduct my expenses at science fiction cons because I make contacts with editors and agents (In at least one case, I ended up selling a story to an anthology I would never have heard of if I hadn’t run into the editor at a con). I’ve deducted my hotel and travel expenses and it hasn’t been a problem (nor was it a problem for other authors who were audited about the expenses).
Can you explain how this works?
I agree with your first sentence, but if the US tax system is anything like the Australian tax system, your second sentence overcomplicates matters.
The broad rule is:
Businesses pay income tax on their net income not their gross income.
It’s not a matter of a tax discount for certain expenses, as such. Simply, to earn money you have to incur expense, and you are taxed on the difference, not on the gross. If it were otherwise, any business whose profit margin did not exceed the tax rate would go broke
I may be off a bit, but the way I understand it;
Let’s say you make $50,000 in a year, but you spent $2000 on business lunches (1 per week, approx. $40 per), and keeping in mind that you can only claim 80% of meal expenses here (in Canada), which is $1600, your taxable income drops to $48,400.
assuming you’re in a 25% tax bracket at that level, that means it’s $400 less you have to pay on your taxes.
S^G
Lets say my biz is in a 25% tax bracket.
I take a couple clients out for dinner and spend $100.
If I had not spent that $100 on a business expense it would have cost $25 in taxes anyway.
So effectively I only spent $75, since $25 were going to go to uncle sam.
This is also why in part deduction need to be monitored. What if I seem to take the same client out over and over.
Sure I sold him/her a $1000 computer, but I spent $2000 entertaining them…the IRS has a very dim view of such practices. We spend alot on biz meals, example we tend to buy lunch for the team working any large onsite job. Against a $2,000 project $30 on lunch isn’t hard to justify.
Except that you can only write off 50% of the cost of the dinner. That means it’s $50 you’re not paying taxes on from that $100 dinner, hence the dinner actually costs you $87.50.
I’m self employed in Spain, currently working for a Spanish client in two locations different from where I live.
Since I need a place to sleep when I’m in those locations and I wouldn’t be there if it wasn’t for business, the rental I have in one of them and the hotels I get in the other are deductible as business expenses. I have a letter from “IRS” saying I can deduct “out of the house meals” so long as they’re during my normal business hours and/or I can prove that the reason I was having dinner at a fancy restaurant was a meeting with some people from the client, not just that I didn’t feel like eating in.
I’m not getting paid that much more than if I was working directly for the first client in my subcontracting chain, but a lot of expenses are deductible as self-employed that wouldn’t be as an employee.
As a regular recipient of such dining (and sports) meetings, anything the US and Canadian (and state and provincial) governments do in order to foster economic growth is okay with me.
Actually, sometimes it’s not okay. Often a supplier will invite me out when I’m on the road, where my food is free of cost to me in the first place. It’s not like he’s doing me any special favor. In the end, my company has to pay him back anyway (if we do business, that is) in the form of markup.