A taxpayer may deduct business-related meals and entertainment expenses incurred for entertaining a client, customer, or employee. Entertainment expenses are deductible only if they are both ordinary and necessary and meet one of the following tests:

Directly-related test – The taxpayer must show all of the following:

  1. The main purpose of the combined business and entertainment is the active conduct of business
  2. The taxpayer did engage in business with the person during the entertainment period
  3. There is more than a general expectation of getting income or some other specific business benefit at some future time

Associated test – Even if the taxpayer’s expenses do not meet the directly-related test, they may meet the associated test. Taxpayer must show that the entertainment is:

  1. Associated with the active conduct of the business, and
  2. Directly before or after a substantial business discussion

Generally a taxpayer may deduct 50% of unreimbursed entertainment expenses.