Business owners of all sizes and tax filing statuses have hoarded receipts and documented client business meals, catered lunches for employees, snacks in the break room, and breakfast pickups on the way to a meeting. But the rules on what meal and entertainment expenses are truly tax deductible can elude even the most experienced business owners. First and foremost, it must be established that there is a valid business purpose to the meal. Once that has been established, the expense will either be 50% or 100% deductible, depending on the nature of the expense and its business purpose.
Meal expenses that are fully (100%) deductible include:
- Recreational expenses for employees (such as a holiday party)
- Office snacks and meals provided to employees (on the business premises, for the convenience of the employer)
- This is open to some interpretation; however, it generally applies to situations where the employer would be providing meals to employees working outside of typical business hours (working late or on weekends), or if employees must remain on the premises to be available to work if needed.
- Expenses for which the business is fully reimbursed
- Expenses which are included in the income of those who are not employees
- Expenses paid to restaurants*
*The Consolidated Appropriations Act, 2021, increased the business meal deduction for the cost of food and beverages provided by a restaurant from 50% to 100% for 2021 and 2022. The IRS clarified that these expenses cannot be extravagant, that the business owner or employee(s) must be present when the meal is provided, and that a restaurant for these purposes does not include a business that primarily sells pre-packaged items not for immediate consumption, nor does it include any eating facility located on the business premises (even if operated by a third party).
Meal expenses that are 50% deductible include:
- Meals related to business meetings with employees, partners, stockholders, etc. (within or outside of the office)
- Meals with clients or vendors
- Meals while traveling for business (including those while attending a seminar or convention)
Under the Tax Cuts and Jobs Act (TCJA) beginning in 2018, only the cost of meals and beverages are deductible, so those items that would fall under the category of “entertainment” (such as tickets to sporting events, or the opera) are no longer deductible. The TCJA did not change the IRS’ substantiation rules but does require that meals and beverages be broken out separately from entertainment expenses. There are two types of records needed for maintaining adequate substantiation to “audit-proof” these deductions:
- Maintain a record of each expense, including the following:
- The amount of the expense (including tax and tip)
- The time and place of the expense
- The business purpose
- The business relationship to the taxpayer of the person receiving the benefit
- Receipts or itemized bills for expenses exceeding $75
It is not necessary to provide these items to your accountant for tax preparation or otherwise unless requested, however it is important to maintain these records in case of IRS audit and to preserve the accuracy of your bookkeeping.
For the latest IRS regulations as of writing, see the IRS guidance under section 274 of the Internal Revenue Code: