Meals Deductions / For meals to be acceptable by the IRS, the following conditions must be met:

1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;

2. The expense is not lavish or extravagant under the circumstances;

3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;

4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact (Business should be discussed and names should be provided); and

5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

6. Tips are included in the receipts.

7. Alcohole beverages are not deductible expense.

8. Entertainments are not deductible expense (e.g., taking a customer to a show or sport event).

Note1: For business discussions during a meal, you must have a clear business goal in mind, the discussion must be substantive beyond casual conversation, and you must have an expectation of income or benefit to your business from the meeting. The meeting’s main purpose should be business related with the eating of food being incidental or secondary. Note 2: You may also deduct as a business tax deduction the cost of meals for business discussions that occurred before or after the meal. For example, after a lengthy day of negotiating a business transaction you take the associate out for a nice dinner to relax. While eating your dinner nothing is discussed about business. Since these two events are so closely related, the cost of the dinner is deducted as a meals expense. The business discussions before or after the meal must be substantial and closely connected. Note 3: Business owners try to deduct meals they eat while traveling throughout the day. This is not a tax deduction. The theory on this is straightforward- you have to eat regardless of owning a business or not. In other words, your meal is not contributing directly to the operations or success of your business. The IRS is clever- they don’t mind giving you a tax deduction today on something that eventually will result in taxable business income through growth and profits in the future. Note 4: Business meals are low hanging fruit for the IRS. We’ve seen thousands of dollars in tax savings disappear before our eyes during an examination because the client could not demonstrate the business purpose. To not lose an audit, make sure you keep receipts beyond relying on the credit card statement. In addition, keep a log or journal of the person(s) you met with and the topics of discussion. Be very specific. Memories fade, so if you intend to reconstruct this evidence upon receipt of your examination notice from the IRS, think twice. IRS agents are no dummies on meals.

Home Deduction / A portion of the dwelling unit which is exclusively used on a regular basis- (A) as the principal place of business for any trade or business of the taxpayer, or (B) as a place of business which is used by patients, clients, or customers in … the normal course of trade or business, (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with … trade or business.” We highlighted the buzzwords intentionally.

Let’s define these more carefully-

 Exclusive means the identifiable space or room is used only for business purposes (so let’s not have a bed in your home office).

 Regular is a squishier since it is a facts and circumstances evaluation. Spending 4 hours a month selling Etsy stuff online probably won’t win too many arguments.

 Principal place of business was once a hot topic but has been tightened up with this language right out of the tax code- “For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.”

 Trade or business has been defined in Commissioner v. Groetzinger, 480 U.S. 23, and reads in part, “to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement does not qualify.”

 Administrative or management activities include a nice list from IRS Publication 587 such as billing customers, clients, or patients, keeping books and records, ordering supplies, setting up appointments, forwarding orders or writing reports (we list more below). For the part of home used exclusively for business on a regular basis, the following expenses can be deducted for it: rent, mortgage interest, property tax, utilities, HOA dues, insurance and repairs to determine the expense amount to be reimbursed. The part of home can be a percentage of total square feet of the home (e.g., 150 square feet out of $1,200 total square feet, or 12.5%) or based on the number of rooms (e.g., 1 room out of 5 rooms, or 20%. Kitchen, bathroom, etc. will be considered a room).

Source: Taxpayer’s Comprehensive Guide to LLCs and S Corps: 2021-2022 Edition by Jason Watson, CPA Senior Partner and WCG Inc. Certified Public Accountants, Business Consultants