Professional Services Guide to Client Entertainment and Meal Tax Deductibility Rules

Are Client Entertainment Expenses Tax Deductible in the US?

For professional services startups, navigating US tax rules for client expenses can be a significant challenge. Since the Tax Cuts and Jobs Act (TCJA) of 2017, the line between taking a client to lunch versus a ballgame has major financial consequences. The TCJA fundamentally changed how these costs are treated, making a clear understanding of the new landscape essential for any US-based company. Misinterpreting these rules can lead to overpaying taxes or facing disallowed deductions in an audit. This guide provides a clear framework for managing these expenses correctly.

The Critical Distinction: Entertainment vs. Business Meal Deductions

The most important shift from the TCJA of 2017 was the elimination of the deduction for most entertainment expenses. Previously, companies could often deduct a portion of client entertainment costs. The current rule is unambiguous: expenses for entertainment, amusement, or recreation are 100% non-deductible. This includes the cost of activities, events, and access to facilities like a golf course or private club.

However, the law created an important exception for business meals. If a meal meets specific criteria, it is typically 50% deductible. This creates a critical distinction that every founder and finance team must manage carefully. The key question is no longer just whether an event had a business purpose, but whether the specific cost was for "entertainment" (0% deductible) or a "meal" (potentially 50% deductible). Misclassifying these expenses is a common bookkeeping error that complicates year-end tax preparation.

How to Qualify for the 50% Business Meal Deduction

For an expense to qualify as a deductible business meal, it must satisfy a clear set of IRS requirements. According to IRS Publication 463, there are four tests for meal deductibility that must be met for the 50% rule to apply.

1. The expense is not lavish or extravagant. This is a test of reasonableness based on the circumstances. A five-course meal at a Michelin-starred restaurant for a minor deal could be flagged, whereas a standard business lunch would not. Context is important, and moderation is the guiding principle.
2. The taxpayer or an employee is present. You or a member of your team must physically attend the meal. You cannot simply give a client a restaurant gift card or pay for their meal when no company representative is there to conduct business.
3. The meal is with a current or potential business contact. The attendees must include clients, customers, suppliers, partners, or professional advisors. The person you are dining with needs to have a clear and current business connection to your company.
4. A substantial business discussion occurs. A clear business purpose must exist for the meal, with a discussion taking place before, during, or immediately after. While the entire meal need not be a negotiation, the primary intent must be to advance your business interests, such as discussing a project renewal or a new proposal.

Meeting all four of these criteria allows your company to deduct 50% of the meal's total cost, including tax and tip.

Common Traps: Understanding Non-Deductible IRS Entertainment Expense Rules

Many founders still operate under outdated assumptions about deductible business expenses. Under current client entertainment tax rules, several common costs are now 0% deductible, regardless of the business context.

These non-deductible expenses include:

• Tickets to sporting events, concerts, or theater performances.
• Dues for country clubs, golf clubs, and social clubs.
• Fees for recreational outings like golf, fishing, or hunting trips.

Even if you discuss business for the entire duration of one of these events, the cost of the ticket or access fee itself is not deductible.

The Bundled Expense Problem

A scenario we repeatedly see involves bundled expenses, where a single purchase includes both entertainment and food. A common example is a catered suite at a sports stadium. The rule here is strict: if the invoice combines entertainment with food and beverages, the food and beverage portion is also non-deductible unless its cost is stated separately on the receipt or invoice.

Consider this comparison:

• Bundled Invoice: An invoice for a "Corporate Skybox Package" for $5,000. This entire amount is treated as a non-deductible entertainment expense.
• Itemized Invoice: An invoice that lists "Skybox Rental: $4,000" and "Catering and Beverages: $1,000." In this case, the $4,000 for entertainment is non-deductible. However, the $1,000 for food and drinks can be treated as a meal expense, making it 50% deductible if it meets the four IRS tests.

Tax Documentation for Client Meetings: Creating Proof of Business Meals

Should the IRS ever question your deductions, your documentation is your only defense. For most startups from pre-seed to Series B, the goal is a simple, defensible system rather than perfect, enterprise-level compliance. The core of tax documentation for client meetings is recording the business purpose for every expense.

While the IRS requires a receipt for any expense of $75 or more, collecting one for every transaction is the best practice. More importantly, you must document the business context. Modern expense tracking for founders is simplified with tools like Ramp, Brex, or Expensify. You should capture the "5 Ws" in the notes field for each transaction.

• Why: The business purpose of the meal (e.g., "Discuss Q4 project scope").
• Who: The names, titles, and company affiliations of everyone who attended.
• When: The date of the meal.
• Where: The name of the restaurant or establishment.
• What/Amount: The total cost of the meal.

Here is an example of a well-documented expense note:

Lunch with Sarah Jenkins (VP of Operations, Globex Corp) to review the draft Master Services Agreement. Attendees: Tom Williams (our CEO), Sarah Jenkins. October 26, 2023. The Downtown Cafe. $185.50.

This creates a clear audit trail. To support this, your Chart of Accounts in QuickBooks should be structured to separate different types of meal and entertainment expenses from the start.

Structuring Your Chart of Accounts in QuickBooks

In your QuickBooks setup, a detailed Chart of Accounts prevents misclassification. A recommended structure helps isolate costs by their deductibility.

6000 - Travel & Entertainment Expenses
6010 - Client Meals (50% Deductible)
6020 - Employee Meals & Events (100% Deductible)
6030 - Marketing Event Food (100% Deductible)
6040 - Entertainment (0% Deductible)

Practical Summary: Applying Client Entertainment Tax Rules

For US-based professional services firms, mastering client entertainment tax rules comes down to three critical distinctions. First is separating non-deductible entertainment from potentially 50% deductible client meals. If it is a ticket to an event, it is entertainment. If it is a meal with a clear business purpose, it can likely be deducted.

Second, you must distinguish 50% deductible client meals from 100% deductible food expenses. For example, food provided at a marketing event, like coffee and pastries at a trade show booth, is generally a fully deductible marketing expense because its purpose is to attract a broad audience of potential customers.

Third, distinguish client meals from internal employee events. Food provided for employees at company parties, team lunches, or other morale-building events is generally a 100% deductible employee morale expense and is not subject to the 50% limitation. By categorizing these costs correctly in your accounting system and consistently documenting their business purpose, you can build a compliant and defensible system. For more guidance, see our expense management hub.

Frequently Asked Questions

Q: Are tickets to a sporting event ever tax deductible if we discuss business?
A: No. Under current IRS entertainment expense rules, the cost of tickets to sporting events, concerts, and other performances is considered a non-deductible entertainment expense. The business discussion does not change the nature of the expense itself, so the ticket cost remains 0% deductible.

Q: What about food and drinks at a sporting event?
A: The cost of food and beverages at an entertainment event can be 50% deductible, but only if the cost is stated separately from the entertainment on the invoice or receipt. If you receive a single bill for a "corporate package," the entire amount is typically non-deductible entertainment.

Q: Is taking a client out for coffee a deductible business meal?
A: Yes, a deductible meal does not have to be a formal lunch or dinner. The cost of coffee, snacks, or other light refreshments with a client can be 50% deductible as long as the expense meets the four standard IRS tests for business meals, including having a substantial business purpose.

Q: What makes an employee meal 100% deductible while a client meal is only 50% deductible?
A: Employee meals provided for the convenience of the employer or at a company-wide event like a holiday party are considered an employee benefit or morale expense, which the tax code allows as a 100% deduction. Client meals fall under specific rules for business development that limit the deduction to 50%.