In light of recent activity by the Internal Revenue Service examining more closely certain business expenses, namely, meals, entertainment, and business use of vehicles, it seems appropriate to review the requirements that must be met for deductibility of business meals and entertainment in the event of an IRS audit.

First and foremost, the business meals and entertainment expenses must be “ordinary and necessary.” Basically, if it is reasonable in your business to entertain clients or other business people, you should be able to pass this test.

Secondly, the expenses must be “directly related to” or “associated with” the business.

“Directly related to” means a specific, concrete business benefit is expected as a result. The principal reason for the event must be business, and you, or an employee, must have engaged in the event actively.

“Associated with” could be equated to “goodwill.” Meaning, meals, shows, sporting events, nightclubs, etc. may qualify if they precede or follow a substantial and legitimate business discussion. To be “associated with,” an expense does not need to derive an immediate result. If the primary purpose of the event is to get new business or encourage the continuation of a current business relationship, the expense should pass the “associated with” test. As with the “directly related to requirements,” you, or an employee, must be present for meals to be deductible.

And, you must meet the substantiation requirements. You must be able to prove that the expense qualifies. Reasonable estimates are not sufficient to stand up to IRS audit.

Finally, there are deduction limitations. The expenses cannot be extravagant or lavish. If they are determined to be, they will be disallowed.

If you would like more information about Pennsylvania Elder Law, Business Law or Tax Law, please contact an experienced Pennsylvania Attorney who is also a Certified Public Accountant (CPA) via email or phone us at (724) 216.6551 at our Greensburg, Pennsylvania office.

The Iezzi Law Office serves clients in southwestern Pennsylvania, including Greensburg, Pittsburgh, Delmont, Monroeville, Murrysville, Latrobe, Irwin, Uniontown, Connellsville, Indiana, Somerset, and other towns located in Westmoreland County, Allegheny County, Fayette County, Indiana County, and Somerset County.

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IRS CIRCULAR 230 DISCLOSURE:

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.