One of the most audited portions of a tax return by the IRS is the meals and entertainment deduction. In fact most people are afraid to even deduct meals at the risk of getting audited and having to pay that money back. However, meals are one of the easiest deductions to substantiate, so please, always deduct your business meals, just make sure you audit proof every meal, and here’s how.
For every business meal you must answer 5 simple questions. As long as you answer these questions you will “audit proof” this portion of your tax return. So here they are. . .
1. Who – Who did you have lunch with and what is the business relationship with the person you ate with. This could be as simple as “John Smith – Customer” – “Or Larry David – Vendor Sales Rep”
2. Where – This is easy enough, just put the name of the restaurant. This is usually written on the receipt anyway, so it’s almost a no brainer. The reason they want to see this is that the IRS wants to make sure you are at a location that is “conducive to business discussion.” Buying popcorn and a hot dog while you’re watching a movie does not qualify because you cannot reasonably have a business discussion in a movie theatre.
3. When – This is also usually written on the receipt but it can’t hurt to write it down again. Remember that if a meal is less that $75 the IRS doesn’t require you to keep a receipt. It makes things a little easier but if you choose not to keep a receipt for whatever reason, just write the date and time in your tax organizer and you are safe. What falls under this category also is the “prearranged appointment” clause. You can’t run into a business associate on your way out of the restaurant, ask him if he closed the Jones account, and then expect to be able to deduct the meal. You must have a prearranged appointment to discuss business.
4. Why – what was the business purpose of the meeting? This is the most important question to answer you must list the exact nature of the business meeting. I recommend writing a complete sentence for this. Simply stating “sales presentation” is ok but I would prefer to see you write, “I met with John Smith to try and recruit him into my MLM business by showing him the compensation plan.” The IRS requires you to have and document a clear business discussion in order for you to deduct your meal expenses.
5. How much – Once again, usually written on the receipt already for you but be sure to include tax and tip for the entire meal.
If you don’t have a tax planner(which I recommend you do, and keep with you at all times), I recommend writing all 5 of these answer on the back of the receipt and here’s why. There is one more regulation that most people forget. You must make these 5 notes in a “reasonable time frame” after the meal. The IRS doesn’t want you trying to go back from memory at the end of the year to document all of your meals. You need to do so within a reasonable time frame. My opinion would be to do it while you are filling out the tip (don’t forget to keep my free tip calculator with you get a copy here). Write the answer to the five questions and date it, that way you are 100% audit proof for that meal.
Then keep them all together. If at audit time, you pull out your file of all your meals, with receipts with the question answers written on the back in an organized, time ranked order, most likely the auditor will skip that portion of the audit altogether.