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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Meal and Entertainment Expenses

If you entertain your client, customer, or employee, the cost of your expenses is deductible, subject to the 50% limit discussed later. (Meal costs for day-care providers are discussed in Chapter 22.) Entertainment may be an important way for you to generate business, create goodwill, and thank employees for a job well done. You may spend a considerable amount of time and expense wining and dining. Be sure to understand the rules to make your costs deductible to the fullest extent possible. Keep in mind that the area of meals and entertainment expenses attracts particular attention from the IRS, but if you meet the requirements for deductibility, your deductions will withstand IRS scrutiny.

General Rules on Deducting Meal and Entertainment Expenses

In order to be deductible as a meal and entertainment expense, an expense must be:

1. An ordinary and necessary business expense, and
2. Able to qualify under a directly related test or an associated test.
Ordinary and necessary business expense
An ordinary expense is one that is common and accepted in your business. A necessary expense is one that is helpful and appropriate to your business. To be necessary, an expense need not be indispensable.

The Directly Related Test

You satisfy the directly related test if you can show that the main purpose of the entertainment activity was the active conduct of business and that you did, in fact, engage in business during the entertainment period. Entertainment ...

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