A taxpayer may deduct business-related meals and entertainment expenses incurred for entertaining a client, customer, or employee. Entertainment expenses are deductible only if they are both ordinary and necessary and meet one of the following tests:
Directly-related test - The taxpayer must show all of the following:
- The main purpose of the combined business and entertainment is the active conduct of business
- The taxpayer did engage in business with the person during the entertainment period
- There is more than a general expectation of getting income or some other specific business benefit at some future time
Associated test - Even if the taxpayer's expenses do not meet the directly-related test, they may meet the associated test. Taxpayer must show that the entertainment is:
- Associated with the active conduct of the business, and
- Directly before or after a substantial business discussion
Generally a taxpayer may deduct 50% of unreimbursed entertainment expenses.
Originally Posted on: Year-End Tax Tip: Deducting Meals & Entertainment Expenses
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