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5 ways to maximize tax-deductible business meal expenses

A Manhattan business lunch by Phillip Capper via Flickr CC
Manhattan businessmen meet over lunch. (Photo by Phillip Capper via Flickr Creative Commons)

The way to a business contract is through a client's stomach.

That revised adage underscores what every business person, whether they run a major corporation or a mom-and-pop company, knows: that personal relationships are key to success.

And much of the time, those relationships are cemented over business meals.

Business meals still tax deductible: The Internal Revenue Service this week gave business a break — or really left a tax break in place — when it comes to deducting the cost of business meals.

The tax agency clarified that the elimination of the business entertainment write-off applies just to strictly entertaining clients.

Meals over which business is discussed, however, remain tax deductible just like the tax code allowed before enactment late last year of Tax Cuts and Jobs Act (TCJA).

The IRS also noted that the prior tax laws that governed business dining deductions also remain in place.

Here's a quick refresher, in the form of this week's Weekly Tax Tip, on how to maximize those still tax-deductible meals that mean more business.

1. Get down to business
Any business meal must be directly related to the active conduct of your business. This includes efforts to get new business or encourage the continuation of an existing business relationship. You can't just take your client, who also happens to be a personal friend, out to dinner, talk about your kids' latest athletic accomplishments and then toss in a comment or two about your latest related work endeavor.

That doesn't mean you can't enjoy the meal with your friend/business associate. Just make sure you mostly talk about your firm and how your client/guest fits into the picture.

2. Don't get outrageous
Sure, a 10-course meal at the hottest restaurant in town might impress new clients, but not necessarily the IRS. The tax agency says that the eating environment still must be conducive to conducting business. Any lavish or extravagant meal expenses are likely to be questioned by an IRS examiner.

And let me share something I've learned as over years of talking business over meals. You generally can keep the dining costs down and have more coherent discussions, business and otherwise, if you don't over indulge in alcoholic beverages.

3. Know what fits your business
Every business owner believes that his/her company is special. For tax deduction purposes, however, the IRS looks at ordinary and necessary expenses. These are business expenses that are the norm for your particular industry.

So unless you're in the food service sector, don't go crazy on a dining experience. It could raise some deduction questions down the road.

4. Understand the limit
As the IRS noted in its meals and entertainment ruling this week, not every penny spent dining out with a customer is deductible. Generally, only 50 percent of your food and beverage costs count.

Again, don't try to bulk this amount up by going overboard. You'll get caught on the lavish limitation.

5. Document, document, document
Internal Revenue Code section 274(a)(1) states that no deduction is allowed for expenses associated with meals unless you can show that the expenditure was directly related to a bona fide business discussion, business meeting or business convention.

This is another reason why good, and separate, business records are so important. Save those receipts and annotate them to show the business purpose of the meal.

The IRS' notice about tax reform's changes or not to meals and entertainment has examples of business situations that can be useful in determining whether your write-off remains deductible.

IRS Publication 463 also will have more on meal and entertainment expenses and how they have changed under the TCJA. That publication hasn't been updated yet, but bookmark the link so you can check it out once the IRS revises it for the 2018 tax year.

The more you know about property writing off your business meals means you'll have more time to focus on getting down to business. And you'll enjoy your dessert — both culinary and the tax-break icing on top — more, too.

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Are travel meals with no business clients 100% deductible?

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