September 17, 2016

How To Deduct A Christmas Meal/Party For A Small LLC?

We have a two member LLC. The second member is my wife. She’s a legit member (professional, with some part-time work contribution), but since it is a spouse, the taxes are simple (LLC income and deductions treated as, well, a pass through entity I guess is the term).

I understand having the LLC buy us non-business meals might be viewed as commingling personal and business funds (not to mention not tax deductible if not business related). However, all that being understood: Any reason this LLC could not buy a Christmas meal/party for its members? Would your answer change if clients were invited? Thanks!

– C.J. Colorado

Answer

A business can deduct all ordinary and necessary business expenses.

This includes business meals and client entertainment, provided you meet the IRS regulations.

The IRS’ rules limiting the deductibility of certain business meals have become stricter due to past abuses by businesses, but generally, if the expense is business related, then it is deductible.

Here is a publication explaining the rules:

IRS Publication 463 Travel, Entertainment, Gift and Car Expenses

The most important factors in deducting more business expenses are:

1. Knowing what your business expenses are.

This means keeping accurate books on Quickbooks or similar small business accounting software.

2. Knowing what is deductible.

This requires having either a good paper-based tax guide or using tax preparation software such as TurboTax, whose interview-style format makes sure that you don’t miss any category of deductions.

3. Ensuring you qualify for the deductions

This means keeping copies of you receipts, written mileage and business purpose notes for deductions automobile expenses, and use of business credit cards and business checking accounts for business expenses.

4. 50% Limitation on Business Meals / Entertainment

The IRS places a special limit on the amount of business meals and entertainment expenses you can deduct. Instead of being able to deduct the full amount spent, you can only deduct 50% of the cost of a business meal & entertainment expense.

See IRS Publication 463 (linked to above) for more detail on exceptions and exceptions to the exceptions.

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