Can an Independent Contractor Deduct Meal Expenses?

Whether an independent contractor can deduct meal expenses will depend on a few factors. As of 2010, the IRS considers independent contractors as self-employed, and their earnings are subject to self-employment tax. (Reference 3) Under the scope of such self-employment the independent contractor is granted the same business expense deductions as any other typical business. (Reference 2, “Who should use this publication” & “50% Limit: 2 – Self-employed”, pp. 2, 11 respectively)

Independent Contractor

Under IRS guidelines, the question whether you are an independent contractor or employee will depend on the surrounding circumstance of each case. (Reference 3) Generally, you are an independent contractor and not an employee if your employer has the right to control or direct only the result of your work. (Id.) However, if the employer has the right to control both what you do and how you do it, you are an employee. (Id.) And this is regardless of whether the employer gives you the freedom of action. (Id.) People who are in an independent trade, business or profession in which they offer their services to the general public are generally independent contractors. (Id.)

Business Expenses

The IRS requires that for your business expense to be deductible, it must be ordinary, meaning common and accepted in your industry, and necessary, meaning helpful and appropriate for your trade or business. (Reference 1, “Personal versus Business Expenses”, p. 2; See also Reference 2, “Introduction”, p. 2) A necessary expense is not required to be indispensable. (Id.)

Personal vs. Business Expense

It is important to distinguish between business expenses from personal expenses. (Reference 1, p. 3) Personal, living or family expenses generally cannot be deducted. (Id.) However, if an expense is used partly for business and partly for personal purposes, the cost of the business portion may be deducted. (Id.) As an independent contractor you may deduct the cost of meals either as overnight business travel expenses or as business-related entertainment expenses. (Reference 2, “Traveling Away From Home” & “Entertainment” pp. 3, 9 respectively)

Entertainment & Travel Expenses

Generally, to qualify for a business entertainment deduction entertainment expenses must be ordinary and necessary while carrying on your trade or business. (Reference 2, “Entertainment”, p. 9) You must show that the entertainment expenses, including the meals and beverages, are directly related to or associated with the conduct of your trade or business. (Reference 2, “Directly-Related Test” & “Associated Test”, pp. 9-10) Furthermore, the meal must have taken place immediately before or after discussions held for the purpose of making a business decision. (Reference 2, “Associated Test”, p. 10) You can deduct meals as an overnight business travel expenses, if while away from home you required sleep or rest to meet the demands of your work. (Reference 2, “Travel”, p. 3) Expenses for meals that are lavish or extravagant cannot be deducted, and a meal is not lavish or extravagant if it is reasonable based on the facts and circumstances. (Reference 2, “Meals” & “What Entertainment Expenses Are Deductible?”, pp. 5, 12 respectively) Business expense deductions for meals are limited to 50% of the actual cost of the meals. (Reference 2, “Meals” & “50% Limit”, pp. 5, 11 respectively) Notice that you must keep records of your actual cost. (Reference 2, “Recordkeeping”, p. 25)

References:

Internal Revenue Services: Publication 535 (2010), Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

Internal Revenue Services: Publication 463 (2010), Travel, Entertainment, Gift, and Car Expenses

http://www.irs.gov/pub/irs-pdf/p463.pdf

Internal Revenue Services: Independent Contractor Defined

http://www.irs.gov/businesses/small/article/0,,id=179115,00.html


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