How to Deduct your Coffee

This article was written by Pete Lachance. He’s a CPA with a Masters in Taxation and 10 years experience. He’s also my very useful husband who has been helping with my home party business taxes for many years.

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Like most people, I’m addicted to my morning coffee. I can’t fully function without it. What if I said, you can deduct that cup of coffee and maybe gain a new customer? Sign you up right!

Well, you can. Just take a potential customer to your local food establishment, talk about some business and buy them a coffee. Simple as that! You could event deduct the cost of taking a customer to a play or a show. The only catch is the IRS restricts your deduction to only deduct 50% of your total bill.

The Basics

The IRS allows direct sellers to deduct 50% of the cost of meals and entertainment related to their business. So…

If you take a customer out to lunch to talk business… deduct 50% of it.
Take a potential customer to a baseball game after a meeting where you talk business… deduct 50% of it.
Take your CPA to dinner and drinks and get some business tax and accounting advice… deduct 50% of it (ahem, I’m free this Friday…).

These examples demonstrate the two type of tests set by the IRS that must be met to deduct 50% of your meals or entertainment expenses… the directly related test and the associated test.

Directly Related Test

This test requires the meal or entertainment to occur in a clear business setting. This can be somewhat subjective but in general if you take someone out for food or drinks and as long as the primary purpose is to discuss business then you should be fine.

Associated Test

This test requires there to be a substantial business discussion either before or after the meal or entertainment. Again, somewhat subjective as to what a substantial business discussion means but as long as the primary purpose is business related (and you actually talk about business) then you should be fine.

Record Keeping

Although taxes is fun for me, it’s not always fun and games for business owners. The IRS requires certain record keeping in order to deduct meals and entertainment expenses. For each deduction the IRS requires you to track