Clear Business Setting Test
Categories: Tax
You’re at a bar with a friend. You go to pay the tab, and he slaps down a credit card.
“Don’t worry,” he says. “I’m going to write this tab off.” He explains that he’ll tell his company that you’re a prospective client and that you were talking business, even though you were talking about how many hardboiled eggs you can fit in your mouth. He’s going to lie.
Not just to his company…but also to the IRS.
What your friend might not know is that, to write something off as dining and entertainment expenses, the tab needs to pass what is known as a "clear business setting test." This means that the event that happened must be solely for business purposes if it is to be deducted on corporate tax returns.
Put it this way: Did the event happen so that the business could gain monetarily in the future?
Consider another scenario. Your friend goes to dinner with a potential client. They have drinks, they discuss the possibility of signing a contract between their companies, and then they spend the next hour talking about their families and current events.
This would pass the Clear Business Setting Test, because the event happened to grow the businesses' revenues.
However, if you’re just there to have drinks with your friend, then he can’t write it off. Doesn’t mean he won’t try.
