J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

20.17 The Restrictive Tests for Meals and Entertainment

Meal and entertainment costs are deductible, subject to the 50% limit (20.25), if they are ordinary and necessary to your business, and also are either:

1. Directly related to the active conduct of your business (20.18), or

2. Directly preceding or following a substantial and bona fide business discussion on a subject associated with the active conduct of your business. This test applies to dining and entertainment in which you seek new business or to goodwill entertainment to encourage the continuation of an existing business relationship. Under this test, you may entertain business associates in nonbusiness settings such as restaurants, theaters, sports arenas, and nightclubs, provided the entertainment directly precedes or follows the business discussion. Business associates are: established or prospective customers, clients, suppliers, employees, agents, partners, or professional advisers, whether established or prospective (20.19).

Ordinary and necessary expenses are those considered helpful and common practice in your business or profession; they do not have to be indispensable to your business.