From Pub. 17

I need a more specific cite than p. 179; I just can't seem to find the relevant material.

From pub. 463

In general, you can deduct only 50% of your business-related meal and entertainment expenses. This limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed.

The 50% limit applies to business meals or entertainment expenses incurred while:

1. Traveling away from home (whether eating alone or with others) on business,
2. Entertaining business customers at your place of business, a restaurant, or other location, or
3. Attending a business convention or reception, business meeting, or business luncheon at a club.

Covered expenses. Taxes and tips relating to a business meal or entertainment activity are included in the amount that is subject to the 50% limit. Expenses such as cover charges for admission to a nightclub, rent paid for a room in which you hold a dinner or cocktail party, or the amount paid for parking at a sports arena are subject to the 50% limit. However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit.

Separating costs. If you pay or incur an expense for goods and services consisting of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of the other services. You must have a reasonable basis for making this allocation. For example, you must allocate your expenses if a hotel includes one or more meals in its room charge, or if you are provided with one per diem amount to cover both your lodging and meal expenses.

Application of 50% limit. The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later.

The 50% limit also applies to activities that are not a trade or business. It applies to meal and entertainment expenses incurred for the production of income, including rental or royalty income. It also applies to the cost of meals included in deductible educational expenses.

When to apply the 50% limit. You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. You first have to determine the amount of meal and entertainment expenses that would be deductible under the rules discussed in this publication.

To determine the actual amount you can deduct if you are an employee, you must apply the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040).

Example 1. You spend $100 for a business-related meal. If $40 of that amount is not allowable because it is considered lavish and extravagant, the remaining $60 is subject to the 50% limit. " Your deduction cannot be more than $30 (.50 ╫ $60).

Example 2. You purchase two tickets to a concert and give them to a client. You purchased the tickets through a ticket agent. You paid $150 for the two tickets, which had a face value of $60 each ($120 total). Your deduction cannot be more than $60 (.50 ╫ $120).

The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible based on the tests and rules explained above.

Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions.

Employee's reimbursed expenses. As an employee, you are not subject to the 50% limit if your employer reimburses you under an accountable plan and does not treat your reimbursement as wages. Accountable plans are discussed in chapter 6.

Self-employed. If you are self-employed, your deductible meal and entertainment expenses are generally subject to the 50% limit. However, your expenses are not subject to the 50% limit if you incur these expenses as an independent contractor, and:

1. Your customer or client reimburses you, or gives you an allowance for these expenses in connection with services you perform, and
2. You provide adequate records of these expenses to your customer or client.

Your client or customer is subject to the 50% limit if he or she can otherwise deduct these expenses.

Example. You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. You are not subject to the directly- related or associated tests, nor are you subject to the 50% limit. If the client can deduct the expenses, the client is subject to the 50% limit.

If you (the contractor) pay or incur expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you must prove that your expenses meet either the directly-related test or the associated test. Your expenses will also be subject to the 50% limit.

Advertising expenses. You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. For example, the expense of sponsoring a television or radio show is deductible, as is the expense of distributing free food and beverages to the general public. Expenses under this exception are not subject to the 50% limit.

Sale of meals or entertainment. You can deduct the cost of providing items such as meals, entertainment, goods and services, or use of facilities, that you actually sell to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense. Expenses under this exception are not subject to the 50% limits.