SEVERAL APPROACHES TO YOUR MEALS 
AND ENTERTAINMENT DEDUCTION

The deduction for meals and entertainment is also covered by the now-famous Section 274(d) of the Internal Revenue Code. As we discussed last month, this section specifies the documentation that is required for certain business expenses. If you can't produce this required documentation, IRS has the right to throw out the deductions you have claimed in this area. It makes good sense to know what's required and set up your systems to capture that information, in order to protect your right to these deductions for your business. The rules you need to follow depend on whether or not you are away from home overnight.

LOCAL BUSINESS MEALS AND ENTERTAINMENT

When you spending the day visiting shops and galleries, but you return home at night, you are not entitled to a deduction for any of your meals. Congress likes to start out with just such a blanket denial of deductions. The major exception to this rule is when the meal is not a meal, but it becomes entertainment. This happens when you have a meal with a business associate of some kind. What I call a "local entertainment meal" is deductible, even if you only pay for your own and don't pick up the entire tab.

A typical scenario would have you leaving at the crack of dawn and picking up some breakfast on the way. By lunch time you have arrived at one of the shops that is carrying your work. You have lunch with the shop owner. As the day progresses, you realize you will be in the neighborhood of one of your most loyal customers at dinner time, so you call ahead and make plans to take them out. You probably get home late that night, tired, but happier to be home than staying in a motel somewhere on the highway! In this case, breakfast would be a personal, non-deductible expense. The lunch and dinner costs would be deductible, but only because you were with someone associated with the business.

The documentation rules are the same as for overnight meals (see below) except for a few important steps. You need to be able to prove not only the business reason for the entertainment (or the expected business benefit), but also the nature of the business discussion that took place. Yes, you read that right! Somewhere in your system, perhaps right on the receipt, you need to make a note of what you talked about with this business associate and how you expect the meeting to help your business. You also need to note the name and occupation of that person you had dinner with, or whatever description is needed to prove their business relationship to you, such as "shop owner" or "customer". Just one more thing... you (or your employee) need to be present a the meal. You can't just pay for it.

OVERNIGHT MEALS - TWO METHODS TO CHOOSE FROM

Meals you have while you are away from home overnight on business are deductible, even when you are alone. Thank goodness! At least they don't expect you to have dinner with customers or other craftpeople every night you're at a show. For those meals when you're away overnight that are not entertainment, you can keep track of the actual amounts you pay or you can elect to use the per diem method.

I recommend you keep track of the actual amounts, if possible, so you can later decide which method will benefit you most. You are allowed to use whichever method gives you a higher deduction, as long as you use the same method for all those expenses for the year. In other words, you can't use the per diem allowance when you are traveling around the countryside and bring most of your food along, and then use the actual cost of your meals when you're at a show in, say, New York! It has to be all done on the same method each year.

The proof you need for your meal expense is pretty simple. You just have to be sure to make a note of it in your expense record or on the receipt. You have to show the date, the name and location of the restaurant and the type of meal, such as dinner. See above for the additional rules for entertainment-type meals. Receipts are required if the expense is $75 or more. This changed from $25 as of October 1, 1995. Do I need to remind you that if you don't keep receipts, you need to write down the cost and other details..unless you use the per diem method.

THE EASIER WAY - PER DIEM

If you've forgotten your Latin, I'll clue you in. Per diem is not "seize the day", but "by the day". This refers to a schedule of daily rates allowed for meals depending on the location you spend the night in. The per diem allowance is for meals and incidental expenses, such as laundry expenses and tips. If you use this method, you do not have to produce any receipts or other documentation other than the dates and towns. IRS provides a list of the rates by location in Publication 1542. You may be able to refer to this table in a public library. Otherwise, your tax advisor will have access to it.

Some typical rates for 1995 are: Kalamazoo, Michigan $30, Manchester, Vermont $26. Most large cities such as New York, Washington, DC, and Boston are $38, but Pittsburgh, for instance, is only $34.

To use the per diem rates, you need to calculate how many days you were in each location by the quarter-day. For instance, if you left after 6:00 in the morning, you would claim three quarters of the rate for that day. If you left in the afternoon, you would get two quarters or one-half of the rate for that day. The easiest way to summarize this information is to keep a list of your trips on a special page in your records. For each trip, note the time and day you left home and the time and day you returned, the place you stayed overnight (city, town or county), and the actual cost of your meals for that time (if you kept track of them). At the end of each line, note how many days and quarters you stayed there.

For example:

     Left 8 a.m. Friday
     Hartford, CT $75.00 2-3/4 days
     Returned 9 p.m. Sunday

Then, when you have access to the rates, you can note the rate for that location and calculate the per diem total. The actual expenses can also be totaled. When you can compare the year's total for the actual expenses with the per diem allowances, you can decide which method gives you the greater deduction.

MEALS ARE ONLY 50% DEDUCTIBLE