How to Deduct the Cost of Client Gifts

By Bryce Warnes on January 18, 2017

Heads up: this article is only relevant for U.S. businesses.

The cost of business-related travel, meals, and entertainment can add up to a hefty tax deduction over the course of a year. That said, there are guidelines you need to follow when you claim these deductions, to avoid an IRS audit.

Deducting travel, meals, and entertainment

As with all other business deductions, meals on work trips need to be ordinary, necessary, and reasonable for the industry you’re in. For the trip itself to qualify for deductions, you need to be away from your regular tax home and the trip must be primarily for business.

If you are traveling primarily for business, you can deduct the full cost of your trip, including transportation and accommodation. The cost of meals is 50 percent deductible.

If the trip is primarily personal but includes business activities, you may be able to claim specific meal expenses that are for business purposes. Whether your entire trip qualifies as a business expense or just certain meals, you will claim the relevant expenses on Form 1040.

No lavish or extravagant expenses

The IRS also draws the line at expenses that are “lavish or extravagant.” While there is no clear definition provided for what this looks like, there’s a good chance the IRS will frown upon ordering the most expensive wine on the menu every time you dine out. The generally accepted wisdom is to avoid going overboard, and it’s up to your discretion to determine what overboard means to you. If you have a penchant for lobster and champagne, you should just be prepared to defend your meal choices (or pay the difference) in the event of an audit.

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Dining out alone

There are stipulations for deducting the cost of meals when you dine out on your own. The bill from a solo meal is deductible only when your business trip is long enough that it requires you to stay overnight, or it requires you to stop for sleep or rest at some point. This means that if you drive to a city three hours away from your regular tax home, work there for the afternoon, and then drive back home, the cost of grabbing lunch on your own is not a deductible expense. On the other hand, if you travel to another city to attend meetings with potential vendors two days in a row before driving home, you are able to deduct all those meal expenses taken alone.

Choosing a deduction method

As a small business owner, you have the option of deducting 50 percent of the actual cost of your meals, or deducting the standard meal allowance.

The GSA lists standard meal allowance rates by location. Generally, the allowance is $51 per day for most areas in the US, with some areas boasting rates up to $74. Note that lower rates apply for the first and last days of travel.

If you’re not sure which method to use, it’s a good idea to keep all of your receipts and work with an accountant to calculate which method provides the biggest deduction at year end. On the other hand, if you’re sure that your expenses won’t significantly exceed the standard meal allowance, then you can avoid the work of calculating individual expenses and just take the standard deduction.

The only important thing to keep in mind is that you can only use one method for an entire fiscal year—so no picking and choosing based on the meal.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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