Rules on Meal & Entertainment Deductions for Dentists
Rules on Meal & Entertainment Deductions for Dentists
What are the rules on business meals and/or entertainment?
In this blog, we’ll go over what the IRS says about meal and entertainment deductions, how to ensure you’re following the rules, what this all means, a few frequently asked questions, and how to keep track of these expenses.
Must be an ordinary (1) and necessary (2) business expense.
- What is ordinary? An expense that is common and accepted in your trade or business.
- What is necessary? One that is helpful and appropriate for your trade or business. It does not have to be “required” to be considered necessary.
In addition, it must meet one of two tests:
- The directly-related test.
- The associated test.
The Directly Related Test
- You must show that the combined business and entertainment was the active conduct of business.
- You did engage in business with the person during the entertainment period; and
- You had more than a general expectation of getting income or some other specific business benefit at some future time.
Generally, the directly related test does not work for hunting/fishing trips or boating trips. However, under certain specific circumstances it would be allowed.
Even if your expenses do not meet the directly-related test, they may meet the associated test.
To meet the associated test for entertainment expenses (including entertainment-related meals) you must show that the entertainment is:
- Associated with the active conduct of your trade or business, and
- Directly before or after a substantial business discussion - If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Among the facts to consider is the place, date, and duration of the business discussion. If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day.
What Does All This Mean?
This is a lot of boring IRS talk. I understand. The gist of it all means that you have to have a “bona fide business purpose” in order to deduct the cost of a business meal.
A bona fide business purpose is defined by:
- If you can prove a real business purpose for the individual's presence. Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible.
So, what is an “incidental service”? There is no definite answer in the code or from the IRS. But if we just look at the definition of “incidental” we get:
- Occurring or likely to occur as an unpredictable or minor accompaniment
- Of a minor, casual, or subordinate nature
Pretty vague, huh? It’s on purpose. The IRS wants the discretion to call something incidental or not.
There are two different categories.
The first is up to 100% deductible. The second is up to 50% deductible.
The facts that need to be considered are:
- WHO: Who are the meals being provided for? Specifically, are more than 50% of attendees shareholders, owners, or family members of a shareholder or owner? Does the person you are meeting with actively conduct business in the field and/or have specific insight to the subject matter in which you are meeting about?
- WHY: Why are you meeting? Specifically is it to eat or is it to discuss some manner of your business?
- WHERE: Where is the meal being provided? Specifically, is it held at the place of business or off-site? (Such as at a restaurant)
- EVENT: Is this a regularly recurring event that is documented in your employee handbook or company’s board of director’s meetings/minutes?
WHO: If more than 50% of attendees that the business is paying for are owners, shareholders, or family members of owners/shareholders the maximum deductible amount is 50%, no matter the circumstances. If more than 50% of attendees that are paid for are non-family members or owners, the maximum is 100%. The person(s) you are meeting with must qualify under one of the following: be active in the line of business that you are discussing, have some direct involvement with a way for your practice to make more money, or have some specific insight to your line of business in order to qualify under the WHO category. The WHO category trumps all other categories.
WHY: If the reason for the meeting is to EAT but business is discussed with someone who qualifies, the maximum deductible amount is 50%. If the reason for the meeting is to MEET and discuss business, the maximum deductible amount is 100%. (Assuming all WHO requirements are met included the over 50% rule)
WHERE/EVENT: If the location is outside of the premises of your business and is not aregularly recurring event, the maximum deductible is 50%. If the location is on the premises of your place of business and is either a regularly or notregularly recurring event, then the meal is up to 100% deductible. If the location is outside of the premises of your business and IS a regularly recurring event, the maximum deductible is 100%.
Remember, if more than 50% of the attendees and payment is for shareholders, owners, or family members of the shareholders/owners, even the situations that are usually 100% are automatically reduced down to 50%. If the attendees do not qualify under the WHO category, i.e. aren’t qualified individuals even 100% examples are reduced to 0%.
Based on these facts there are two potential outcomes:
- Outcome #1 – The meal is up to 100% deductible.
- Outcome #2 – The meal is up to 50% deductible.
Here are the cut and dry examples to everyone’s question of “Is my business meal deductible?”
Some real life examples (100% deductible):
- You have a meeting for your staff to cover upcoming business challenges and goals. The meeting lasts a majority of the day and is at your practice. More than 50% of the attendees are employees that aren’t shareholders, owners, or family members of owners/shareholders of the business. Lunch is provided on the premises of the business on the day of the meeting. (If it were off the premises, it would be 50% deductible)
- You have an annual Christmas party at a restaurant for employees. The reason this one is allowed off premises is that it’s considered an annual event. (Same rule, must be available to all employees and over 50% of attendees must be non-owners/shareholders) You need to document the annual event in your employee handbook to help “prove” it’s an annual event and allowable under 100% deductibility rules.
- You have a group of colleagues that meet once a month to go over business best practices, news in the industry, marketing, etc. You are required to pay a fee once a year to the group/study club. The fee is equal to the cost of the entire group’s meal once a year. (If you were paying the restaurant directly, this would be at most 50% deductible)
- Snacks for the office. As long as they are available to employees who aren’t shareholders or owners of the business. This doesn’t mean you can’t eat the snacks, it just means they have to be available to employees and for the benefit of the employees. (And more than 50% of the people the snacks are available to have to be non-owners/shareholders or their family members)
- You go to a meeting with three colleagues to discuss marketing and trends they are seeing in their practices. You end up eating after the meeting and you pay for everyone’s meal. This is 100% deductible because more than 50% of attendees are not family members and are all qualified. However, you need to be sure that you document that the reason to meet was for the marketing and trends, not to eat.
Some real life versions of example 2:
- You go out to eat with your spouse or family member. You end up talking about marketing in your business but your spouse or family member does not actively work on your marketing. This is 0% deductible.
- You go out to talk about marketing with your spouse and your spouse works actively on your marketing. You end up eating at this meeting. This is 50% deductible. (Note: You will never be able to 100% deduct this meal as you cannot get past the “over 50% of attendees” rule)
- You go out to eat with a friend. You end up talking about controlling overhead in your business but the friend is not in your industry or has any specific insight to your line of business. This is 0% deductible.
- You go out with a colleague/friend to talk about controlling overhead in your business and the friend has specific insight to the industry. You end up eating at this meeting. This is 50% deductible. (If you were to go to a meeting with two colleagues and happened to eat, it could be 100% deductible)
- You go out to eat with a potential patient/client/referral source. You go with the intention of convincing them to become a patient/client/referral source and it’s reasonable to assume the meal will lead to income for you. This is 50% deductible.
- You are travelling on business. (Defined as: You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work or to travel while away.) You have meals while traveling. These meals are considered to be incidental of the travel and as such are 50% deductible.
Another important distinction: The purpose of the meeting or the meal is important.
If you go to a meeting and end up having a meal, the meal is incidental and thereby allowed to up to 50%.
Let me reemphasize that to you. Going to a meal and discussing business won’t work most of the time.
Going to a meeting and having a meal will work. Why? A LOT of business professionals can only fit in a meeting during lunch hours or after work. It just so happens that is when you are discussing business and you are paying for the meal; so the meal is incidental. (Note, this isn’t a convenience factor, it is just when the meeting was scheduled)
So how do we protect ourselves from these expenses being deemed inappropriate? Substantiation. (In other words, proof)
Let’s substantiate each of the qualifications we outlined earlier:
WHO: You will need a record of who was in attendance. You can accomplish this by writing down the names of the people in attendance and keeping up with that piece of paper.
WHY: You will need a record of why you were meeting. You can accomplish this by writing notes about the meeting. Depending on the nature of the meeting you could include how the idea for the meeting came about, what was discussed during the meeting, the length of the meeting, and the outcome of the meeting. (You don’t have to do all of that, but you should document some of it) Writing it down helps.
WHERE: You will need documentation of where the meeting was held and where the meal was held. This is typically on your receipt.
EVENT: You will need documentation of the event. If it is a recurring event, you will need to have something in your handbook or address the nature of the recurring event in a board of directors or shareholder’s minutes from a meeting. If it is a non-recurring event, you should have some written document like a memo that was given out to employees to let them know about the event.
In all of these cases, you will need to have a copy of your receipt. But that may not be the only document you will want to keep up with.
For instance, if you talk about a new advertising method, it would be beneficial to have a copy of some research that went along with that discussion.
That research could be the same day or within a few days of the meeting if the need for the research arose from the discussion.
Also, don’t forget to log your mileage to and from ANY business meeting. This is considered a deductible expense as well. Read more about automobile expenses for dentists here.
Other common questions:
Q: If my colleague’s spouse happens to come along, is their part deductible?
Here is what the IRS says directly:
“You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment.
You entertain a customer. The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. The customer's spouse joins you because it is impractical to entertain the customer without the spouse. You can deduct the cost of entertaining the customer's spouse. If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible.”
You can interchange the word “customer” with any of the qualified WHO’s we talked about earlier and it will fly.
Q: If some percentage of the people in attendance aren’t related to business, is their part deductible?
No. You would have to allocate amongst the business portion. For example, if 10 people are in attendance including yourself, 5 business associates, and 4 social guests (not spouses) you would take 6/10th of the expense.
How to Track Business Meals & Entertainment Expenses
I’ve now shown you what is allowed, which category the meals fall in, and what to track. I’ll leave you with how I track and “automate” my record-keeping for receipts and other documents.
Note: I’m going to show a super-techie way, a semi-techie way, and a non-techie way. Choose the one you prefer.
Techie Way of Keeping up with Receipts:
Step #1: Download the IFTTT app (If this, then that) you will have to set up an account with IFTTT and give it access to your email. (Gmail is the easiest to use and the accounts are free, but if you are using iOS you should be able to enable the “email” feature)
Step #2: Set up a dropbox or google drive account. (I use google drive)
Step #3: Go to the recipe area of IFTTT and search for receipts. You should see one that points emails to Google Drive or Dropbox and says it will log the emails titled “receipt” to your online account. It looks like this:
Step #4: When out at a meeting and you have a business meal, snap a photo of your receipt and either on the receipt or in the body of the email write who you met with and the business purpose.
Step #5: Email the photo to your-self with the email titled “Receipt”.
Step #6: Enjoy as your business meals and receipts are logged online for you. This is what it looks like:
Inside that folder you’ll find a spreadsheet. The spreadsheet will look like this:
If I wanted to add documentation, I’d simply send myself another email with the “receipt” title and attach it to the email, which would create another line on the spreadsheet.
A Slightly Less Techie Way
Step #1: Create a new gmail account. Name it something short like, firstname.lastname@example.org.
Step #2: On your receipt, write down the name of who you met with, along with the business purpose of the meeting and what was discussed.
Step #3: Take a picture of the receipt and any other documentation.
Step #4: Email the picture to the new email account or add it to an online storage device for safe keeping. (Most online storages allow you to send it to an email as a way of logging files as well)
If you are using the email version, I’d suggest labelling all emails the same so that you can filter the emails later. The clear benefit to this is that for all those digital receipts you receive from online vendors; you can simply hit the forward button. You can also have your staff email pictures to that email account for you, it’s basically an instant repository of receipts that are searchable, sortable, and survive documentation requirements.
If you are using the online storage version, I’d recommend a separate folder for meals and entertainment receipts.
Non-techie way of keeping up of receipts and documentation
Step #1: Receive the receipt; write on the receipt the business purpose and who you met with.
Step #2: Take a copy of any documentation that supports the deduction.
Step #3: File it away and keep it with every other piece of documentation for a period of up to 7 years.