Business Meals Revisited
September 10th, 2023 at 4:22 PM
I hope this message finds you well. I am writing to provide valuable insights regarding the tax implications of business meals.
As you may already be aware, there is a contradiction in the tax laws regarding personal living expenses, specifically personal meals and business meal tax deductions.
This is best illustrated by what tax professionals call the “Sutter rule.” Dr. Sutter, from whom the rule takes its name, lost the deductions for his chamber of commerce lunches and his lunches while serving on a hospital board, all because the cost of those business lunches did not exceed his personal meal costs.
The IRS invokes the Sutter rule without any specific standard, generally focusing on what it perceives as abuse or a disproportionately high number of business meals deducted. Interestingly, the IRS has applied this rule only to in-town business meals, not to those consumed while traveling for business.
Given this complex landscape, it is important to formulate an effective defense strategy. This essentially involves two elements: logic and legislation.
- The logic defense involves demonstrating that your business meals are more expensive than your personal meals.
- The legislative defense rests on the lawmakers who reduced business meal deductions to 80 percent and later to 50 percent, thereby accounting for the personal benefits.
To ensure your meal deductions, it’s critical to have the following:
- Receipts showing the purchases (food and drinks consumed)
- Proof of payment (credit card receipt/statement or canceled check)
- Names of the people with whom you had the meals
- A record of the business reason for the meal
For example, if you and a client, Harry Smith, have a Dutch-treat dinner that costs you $100, you should keep the receipt showing the food and drink as well as the second receipt showing the $100 charge to your credit card. On the receipt, you should write: “Harry Smith, client, $100 (my half), maintain relationship.”
Note in our example that you did not have to pay for Harry’s dinner to deduct your dinner. You simply had to have an ordinary business reason for dinner with Harry. But both Dutch-treat and business meals where you pick up the tab for all face the Sutter rule.
Understanding the Sutter rule, identifying its triggers, and building a defense are crucial steps in managing your business meal deductions. Please feel free to call me on my direct line if you would like to discuss the Sutter rule.
Mark S. Fineberg, CPA