23 Jul Can I deduct family dinner as business expense?

 Q. I’m having a debate with my business partner. We both go to dinner with family, but how will the IRS ever know that we’re not having business dinners? If we wanted to deduct the meals, that is.

A. Uh-oh. What would Honest Abe think about you messing with the IRS?

The IRS has very specific guidelines and tests that need to be met if the entertainment expenses can be deducted as a business expense, said Pat Daquila, a certified public accountant with Lassus Wherley in New Providence.
The taxpayer must meet one of the two tests, she said.

First, the entertainment has to be directly related and/or needs to be associated to the taxpayer’s trade or business.

“A meeting with a group that includes individuals who are not business associates, such as the taxpayer’s family, at a restaurant would not be considered directly related,” she said. “There are too many distractions that would prevent a taxpayer from actively conducting business if family members are present.”

The entertainment also has to take place in a business setting, and the taxpayer needs to conduct business at that meeting, Daquila said.

In addition, the entertainment needs to be associated with the taxpayer’s trade or business and should take place either before or after a substantial business discussion.

Generally, a taxpayer can only deduct 50 percent of their entertainment expenses, she said.

“As with any other deductions on a tax return, if a taxpayer were to be audited, the burden of proof would be on the taxpayer to prove that entertainment deduction was a legitimate business expense,” she said.

So you should be sure to keep records as to the purpose and who attended the business dinner, if you plan to take it as a deduction.

If you can’t substantiate a deduction, then the IRS would disallow it.

“A taxpayer could also face substantial penalties, fines, and interest if the IRS finds that there is any intention of tax fraud,” Daquila said.

Let’s repeat that: tax fraud.

Gail Rosen, a Martinsville-based certified public accountant, said various civil and criminal penalties are imposed on taxpayers who violate the tax law.

“Although you now believe that the IRS won’t find out if you lie, you do not know that is necessarily true,” Rosen said. “People who are your good friends, partners and family now may not be as close with you in the future and find reason to inform the government about the lies that you told.”

You might find yourself regretting in the future the few dollars that you gained in tax deductions today.

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This story was first posted in July 2015.