If you wish to claim certain business expenses, by the very nature of the definition, such expenses should be directed related to the business. The occasion for incurring the expense for a meal or providing an entertainment should be directly related to a legitimate business activity that is recorded and can be proven, if required. Only then will you be allowed to treat these monies as expenses and not as wages or profits while calculating your income for purposes of tax.
So, exactly how does one go about deducting costs incurred for meals and entertainment as legitimate expenses and allow for tax exemption? Here are some thoughts in this regard.
First, determine with your accounts / finance department, or if you are a small business and do not have a separate accounts desk, then ask your auditor for the following -
Maximum limits for deduction of costs incurred as meals and entertainment in the course of your day to day business activities. Most often, up to 50% of your meals and entertainment expenses are permitted to be deducted from taxable income.
Note that this rate varies for certain locations. So, if you are a taxpayer in the USA and are prone to extensive traveling in the scope of your work, it is best advised to refer to the Per Diem Tables regularly updated and issued by the Internal Revenue Service, Department of Treasury. Here, they not only provide the maximum limits allowed for such deductions, they also contain references to how the calculation of the expenses are made; what expenses are allowable by the authorities and so on.
Primarily, costs incurred for meals and entertainment must have a direct correlation to your business activities and it should be necessary and incurred in the ordinary course of conducting business. So, it is quite acceptable to claim all meals incurred while on a business trip, whether eaten alone or in the company of some clients and affiliates, but it would not be acceptable if you book expenses regularly while being in your town of residence for this purpose. This basic rule of thumb applies in cases of entertainment as well. This does not mean that you are disallowed from claiming expenses toward meals and entertainment while in your home town. You can quite possibly do so if it can be clearly established that a need for the meal or entertainment arose in connection with a business discussion or transaction. Besides claiming meals and entertainment costs incurred with your clients and customers it is also allowed, for example, when doing goodwill for your business. So, if you are incurring expenses while meeting with an industry representative, a public relations person, a representative of the local chamber and so on, it could be allowed as well.
With tax matters being as complicated as they are, it is to your benefit to get oriented with the basic principles that surround these permitted expenses and the objective behind the relevant tax laws. This not only is self-educative, it also allows you to function freely without getting approval from accountants all the time.
In all cases, keep adequate proof of the business activities and expenses including all dining and entertainment expenses, taxi receipts, airline tickets and so on.