Can I deduct my wife´s dinner?
Ian is a software engineering consultant who works for a small firm of which he is a 25% owner. He much prefers working at his computer to going out on the town, but occasionally he finds it necessary to take clients or prospective clients to dinner.
"I can talk about software technology all day," he told me, "but I´m a bumbling buffoon when it comes to socializing. The only way I manage to get through those ordeals where I´m supposed to wine and dine a client is to take Susan [Ian’s wife]. She´s just incredible. She can talk to anybody about anything. So … since the client would have a terrible time with just me there, can´t I deduct my wife´s dinner?"
The rule is that the cost of the dinner for both the host’s and the customer’s or client’s spouse is deductible if it´s not practical to entertain the client or customer without his or her spouse. But Ian needs Susan at dinner, regardless of the presence or absence of his client´s wife. Can Ian deduct the cost of Susan´s meal, even if the client comes alone? IRS would be likely to challenge this — the greater the amount deducted for Susan´s meals, the more likely it would be of interest to IRS.
For deductions of this sort that do not fit neatly within a section of the Tax Code or Treasury Regulation, you would want to have extra documentation. For example, Ian´s firm might want to record minutes of a meeting where they discuss the need for Ian to entertain clients and prospects, together with Ian´s difficulties in social situations and Susan´s social skills. If the other partners in Ian´s firm agree that Susan´s presence at client dinners will be very likely to help the firm increase sales and retain existing clients, it would be difficult for IRS to argue convincingly that the cost of Susan´s meals is not an ordinary and necessary business expense.
When is entertaining not entertainment?
In general, the deduction for meals and entertainment expenses is 50% of what you actually spend (75% for the transportation industry in 2006). But in some cases, the cost of a meal looks a lot more like a regular business expense than an entertainment expense.
Allan has a weekend business leading walking tours in Manhattan. A regular feature of each tour is a box lunch or snack pack for each participant, included in the price of the tour. In Allan´s case, the cost of lunch and snacks is 100% deductible, as Costs of Sales or Customer Supplies.
Likewise, for film or music critics, travel agents, food critics, costs that would ordinarily be 50% deductible as entertainment expenses are 100% deductible as regular business expenses. As always for costs of activities that people generally do for fun and pleasure, it is important to have abundant documentation of your profit motive and the relationship between the activity and the business. Calling yourself a film critic because you view lots of movies and tell your friends about them is probably not going to fly.