Intuit Academy Tax Practice Exam

Which of the following is considered a legitimate business expense for a sole proprietor?

1. Personal meals when out with clients

2. 100% of meals specifically for client meetings

3. Commuting expenses to and from home

4. Entertainment costs unrelated to work

The correct answer is: 100% of meals specifically for client meetings

A legitimate business expense for a sole proprietor must meet certain criteria established by tax regulations, primarily that the expense must be both ordinary and necessary for the business. Meals specifically associated with client meetings can indeed be fully deductible, provided they meet the criteria outlined by the IRS. In this case, 100% of meals specifically for client meetings are considered a legitimate business expense because they are directly connected to the purpose of conducting business. This is in line with the regulations that allow sole proprietors to deduct meals when they are directly tied to business activities. It's important for the taxpayer to maintain adequate documentation and ensure that the meals are not deemed lavish or extravagant under the circumstances. In contrast, personal meals when out with clients are not fully deductible as they do not necessarily serve a direct business purpose and can blur the line between personal and business expenses. Commuting expenses from home to a permanent place of business are generally categorized as personal expenses and are not deductible. Finally, entertainment costs that are unrelated to work do not qualify as business expenses because they do not serve a direct business purpose, thus failing to meet the necessary criteria for deductibility.