Business entertainment deductions may attract IRS attention so you can expect to be questioned about sizable deductions in this category. You’ll probably be all right, though, as long as you’re prepared with some plausible answers.
To sustain entertainment deductions you’ll need thorough records. Keep a log that shows when and where the entertainment took place as well as the amount you spent. In this log, write down the names of the people you entertained, their business relationship to you and the nature of the business discussions that took place. Indicate the business benefit you hoped would result.
In case you’re unable to keep a log, pay for entertainment by credit card and write down the details on the charge slip. You must break out lodging vs. meals or other entertainment expenses if such items are combined on one credit card charge. Under the tax code, all expenses for $75 or more must be supported by receipts.
The main reason for disallowance of business entertainment deductions is the failure to show the place and business purpose of an entertainment expense. Therefore, you should pay special attention to these aspects of your record-keeping. Make the entries at or close to the time the expense is incurred. Trying to compile supporting evidence after the fact may cause trouble if your tax return is audited by the IRS.