03/ 21/ 2006
by Charles R. McConnell
Anyone who has been in the business world for more than a few years has probably heard of the infamous “three-martini lunch” of days gone by. Those who have heard of it know that the three-martini lunch has gone the way of the buggy whip, never to return. The three-martini lunch essentially vanished for two reasons: the increased attention of many organizations to alcohol consumption during the workday and the fact that such expenditures are no longer fully deductible as business expenses.
A great deal of business is conducted over lunch, over dinner, on the golf course, before, during and after sporting events and in other settings combining business with pleasure. In the not-too-distant past, as many business people will recall, activities combining business with pleasure were unquestionably 100 percent deductible as business expenses. The Internal Revenue Service, however, reduced the level of deductibility in two stages: first to 80 percent and later to 50 percent where it has stayed the last several years. Therefore, “qualifying”costs of doing business while entertaining customers or clients are only 50 percent deductible. I stress the term qualifying because some costs do not qualify as deductible. Take game tickets, for example. The tickets themselves are 50 percent deductible, but ticket broker’s fees and scalper’s fees are not. But costs of transportation related to such events––taxi fares to and from the game, for example––are deductible.
When it comes to business entertainment, which usually includes meals, businesses should maintain an entertainment log. This log should capture the following for each occasion: who was entertained, where the entertainment occurred, what business was transacted or discussed, and the costs incurred. You should retain all pertinent receipts with the log. You may never be called upon to produce the log and receipts, but if this does occur––a tax audit is always a possibility––these expenses will probably be disallowed.
In an effort to increase their deductions, some businesses tried recasting meals and entertainment costs as advertising costs (since advertising costs are fully deductible business expenses). However, numerous audits and reviews ruled out such reasoning.
If you give event tickets to customers or clients as gifts, the tickets are 100 percent deductible, theoretically. But the catch is that tax-deductible business gifts are limited by the tax code to $25 per person, per year. Thus, you can't get much of a deduction if you give a customer a pair of Super Bowl tickets (or, for that matter, a pair of 50-yard-line tickets to any National Football League game).
In contrast to entertaining customers, certain employee entertainment expenses are fully deductible. Parties, picnics, employee recognition dinners and similar activities for employees and their families are fully deductible.
Another form of activity that often combines business with pleasure is attending trade shows, conferences, conventions and similar events. Family members often accompany employees to these activities, which are frequently held in resort areas or other vacation settings. For these kinds of activities, reasonable employee costs are deductible, according to present rules. No costs associated with other family members, however, can be taken as business expenses. This means, for example, that if an employee and spouse travel to a business conference, the employee is responsible for the difference between single and double occupancy. If it’s a plane trip, the employee must pay for the spouse’s ticket. But if the employee drives to the conference and is paid mileage for doing so, it doesn't matter how many people travel in the car.
When employees travel on business, actual travel and lodging costs are ordinarily deductible. A small amount is allowed for incidental expenses, such as tips for porters, bellhops, etc. Meals are subject to the 50 percent deductible rule. Many organizations also place daily limits on the amount they will reimburse for meals, and some have also adopted the practice of excluding alcoholic beverages from reimbursable meal expenses.
For more detailed information about deductions, business professionals traveling on their own or on behalf of an employer should review the instructions for line 24, parts a and b, of Schedule C, Form 1040.
Under present IRS rules, it remains possible to successfully mix business with pleasure to some extent. But don't expect the rules governing deductibility of expenses to change in your favor any time soon. Remember, you'll never see the fully deductible three-martini lunch again.
