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

20.18 Directly Related Dining and Entertainment

The directly related test limits the deduction of dining and entertainment costs at restaurants, nightclubs, on yachts, at sporting events, on hunting trips, and during social events.

The directly related test for dining and entertainment costs may be met in one of three ways: (1) under the generally related test; (2) as expenses incurred in a clear business setting; or (3) as expenses incurred for services performed. If dining or entertainment fails to meet the directly related tests, it may qualify under the goodwill entertainment rules (20.19), which require the holding of a business discussion before or after the entertainment.

Generally related test.

Under this test, you must show a business motive for the dining or entertainment and business activity during the entertainment. You must show that you had more than a general expectation of getting future income or other specific business benefit (other than goodwill). Although you do not have to prove that income or other business benefit actually resulted from the expense, such evidence will help support your claim. What type of business activity will an IRS agent look for? The agent will seek proof that a business meeting, negotiation, or discussion took place during the period of dining or entertainment. It is not necessary that more time be devoted to business than to entertainment. What if you did not talk business? You must prove that you would have done so except for reasons ...