TIP #2: Meals That Make You Money
Sharing a meal with a prospect or a client can be a great way to grow your business. For centuries people have used this technique. But did you know that many of your meals could be tax-deductible?
Let me ask you a serious question. Who is a potential prospect for your business? Who can give you referrals? The answer is everyone! So if you follow the rules we will show you, you will be able to deduct many of the meals you eat out.
THE IRS ALLOWS YOU TO DEDUCT 50% OF MEALS
If you take a client out and spend $100 on a nice steak dinner, and you follow the rules outlined below, then you could deduct $50 of the meal. Remember if you are in the 35% tax bracket then this will save you $17.50 in cash at the end of the year ($50 x 35%).
How do you know if your meal qualifies as a deduction? This subject can be confusing, so lets turn you into an expert right now. There are some simple rules to help you differentiate;
RULES FOR DEDUCTING MEALS
• You must have the appointment set up in advance and whomever you are eating
with must expect to talk about business.
• You must talk about business before, during, or after the meal.
• You must eat in a place that is easy to talk about business.
• The expense must be recorded soon after the meal.
WHAT DO YOU NEED TO PROVE IT?
To prove to the IRS that your meal is deductible, you MUST record what we call the 4 W’s
and the H.
- Who did you take out to eat? (write down their full name)
- What was the expense? (business meal)
- Where did you eat? (name of restaurant)
- Why should this be considered a business meal?
(Be specific, for example: asked for referrals, discussed a specific product, etc.)
- How much did the meal cost? (enter the full amount including the tip)
As you can see, there is a lot of information that is not available on your credit card statement. Many business owners write on each receipt who they met with and the notes for their business discussion.
BUT WHAT HAPPENS WHEN THOSE RECEIPTS FADE?
A lot of receipts fade, especially the ones on thermal paper. Make sure you keep a digital copy of those receipts by scanning a copy of them.
Taxbot Makes It Easy: If you are using Taxbot, then all you have to do is snap a picture and then answer the questions the app asks to ensure your compliance.
Note: If you have unrealistically high meal deductions, the IRS can disallow it using what they call the Sutter Rule. For example, if you have more business meal deductions than you have regular meals then you are probably going to have those meals disallowed.
EXCEPTIONS TO THE 50% RULE
Eating Out With Your Spouse
Unfortunately, you cannot deduct eating out with your spouse. Even if they are your business partner and you discuss business, the IRS has disallowed this deduction.
There are a few exceptions though. If you go out with a client or prospect and they bring a significant other, you can bring your spouse or companion and deduct 50% of your companion’s meal. However, if the client or prospect doesn’t bring a significant other, then your significant other’s portion of the meal is not deductible.
Eating at Home With Clients or Prospects
If you conduct a sales presentation or a seminar from your home (a lot of home based businesses do this) then you can qualify for a 100% write off of the food if you follow a few simple rules. You still have to prove to the IRS that the gathering was business-related and there was a business discussion.
You should document your visitors and your discussions with them. It’s easier to document this if you keep these events to fewer than 12 people. It is more likely you discussed business with 12 people than 36 people.
If you want to have a bigger dinner, display pictures of products or services on your walls or table. Make sure you take pictures so you have proof that you had prominent displays. Alternatively, you can send invitations that clearly state the business purpose of the meeting. Keep an invitation for your records in case of an audit.
If you are using Taxbot, simply add a category for “Eating at Home.” Then add an expense with the documentation of the food costs. Since you can only attach one picture to each expense in Taxbot, we suggest you add a second expense and attach a picture of the displays at the party or the invitations. Just leave the expense amount at zero and put “proof” in the description.
Note: Never combine personal and business parties. For example, don’t invite clients over for your kids’ birthday party and expect to deduct the party.