The first tax season as an entrepreneur can be confusing. On one hand, you are excited about your brand new venture and all the possibilities that come with being your own boss. However, you heard some random information floating around about the IRS and how now you can write off your lunches or that movie you went to see with your husband because “we talked about our business in the car on the way so really it was a business meeting”. You’re not sure what to believe, what receipts to keep, and how to manage all the details.
Totally understandable. So let’s clear this up with a question a taxpayer recently asked me about business meals and mileage record-keeping:
“How do you simplify your tax records for filing? For example, your mileage or meals if you take someone to lunch for your business or if you and your husband are discussing your business. Can you claim your meal?”
Valid questions. Better to do things right the first time than get audited and have to pay back interest, penalties, and back taxes later down the road. (These rules apply to a small business operating as a DBA (Doing Business As) or an LLC).
How to simplify your mileage record-keeping
In regards to mileage, MileIQ comes highly recommended for any person who needs to track their mileage, whether it’s charitable, medical, or business mileage. Better than paper and pencil, it’s the app I use everyday. Some of its many advantages:
- Simple, clean, and easy to use interface
- Works from your iPhone, Android device, or computer
- Tracks your mileage automatically without you having to turn it on/off (keep your phone’s GPS enabled) in the background without draining your phone’s battery
- Keeps you organized and allows you to run reports for your EA, CPA, or the IRS.
How to deduct meals as business expenses
When “wining and dining” a potential client, or taking a customer out to lunch, provided the main purpose of the meeting is to discuss business, the IRS allows you to deduct 50% of that expense under the “meals and entertainment” deduction. However, you must have records to prove the business purpose. On the receipt, you need to record the business relationship of the person being entertained or fed…and then upload it to your document management system as soon as possible. Restaurant receipts have the tendency to fade quickly, no matter how you keep them out of the sunlight. Even better, with an app like Freshbooks, you can store a photo of the receipt immediately.
However, if it’s an outing between you and your spouse, the IRS can easily argue that it’s just a personal meal and you could have been discussing personal matters. If, instead, you are buying lunch for your employees at the office to bribe them to keep working, that’s a different matter under different rules. That’s not to say that it’s impossible to prove your lunch with hubby wasn’t a marketing meeting. But as with everything that involves the IRS, you will need to be thorough in your documentation (minutes, meeting notes, an agenda, etc.). In instances where you mentioned business in passing, there is no meal and entertainment deduction.
Always check with your Enrolled Agent, CPA or tax professional when it comes to matters where there is a gray area or it depends on the business. The bottom line is to be able to prove to the IRS that the expense is necessary and reasonable for your industry in order to generate revenue.
