Deducting Meals as Business Expenses
Meals Still Deductible – Entertainment Expenses Not Deductible
Taking out customers, vendors, or potential employees for a meal and some entertainment is a great way to build your business. And meals and entertainment for business purposes are a legitimate business tax deduction, but there are limits on what you can deduct.
The 2017 Tax Cuts and Jobs Act has made major changes in the deduction of meals and entertainment expenses, beginning with the 2018 tax year and going forward. Your company can no longer deduct business entertainment expenses and some deductions on meal expenses have been changed or reduced.
Business Meal Expense Deductions – An Overview
The major change in business expense deductions in the tax law is the elimination of entertainment expenses, which means no more deductions for taking a client to a sporting event, concert, or resort. Business meal expenses are still deductible, with some changes.
What hasn't changed is that business meals may still be deducted at 50% if:
- The business owner or employee is present,
- The cost of the meal or beverages isn't "lavish or extravagant,"
- The meal is with a business contact (like a customer, employee, vendor, or consultant), and
- The meal has an "ordinary and necessary" business purpose.
Since entertainment is no longer deductible, you can only deduct meal costs at entertainment events if the cost can be separated (like a catered meal delivered to a skybox at a sporting event).
Deducting Meals You Give to Employees
You can deduct the cost of meals for employees, both individually and in groups, with some limitations.
- Meals for employees while traveling, for all-employee events, or business meals, in general, are still deductible at 50%.
- Meals for employees at your location (think cafeteria or break room) are no longer deductible at 100%, but only at 50%.
Meals for Employees as Fringe Benefits
Some meals you give to employees are considered benefits, they are taxable to the employees, and you must report those benefits on their W-2 form.
De Minimis Rules
You don't have to include the cost of meals to employees if these costs are small (called de minimis), like coffee and donuts at a meeting or an occasional meal to an employee who is working overtime.
The de minimis rule also applies for employee meals at your company cafeteria if the annual revenue of the facility is equal to or greater than the costs.
But you can't exclude these benefits from the wages of highly compensated employees (5% owners or individuals paid more than $125,000) unless the benefits are available to all employees or a group of employees that doesn't favor the highly compensated individuals.
Other Meals for Employees
You don't have to include the value of meals to employees that are furnished at your business location and for your business convenience. If you allow employees to get additional pay instead of meals, the additional pay is taxable to them. These meals must be for your business convenience. For example, if you give employees meals at your cafeteria for employees who must be available for emergency calls, the meal cost may not be taxable to them.
If your business is audited, you may be required to give the IRS specific reasons and documentation (policies and job descriptions, for example) to prove that the meals your business provides are to enable the employee to fulfill the duties of a specific position.
The concept of "at your convenience" means that your business has a substantial business reason for providing the meals. A written statement in a contract or employee handbook isn't enough to establish business convenience.
How to Take Meal Expense Deductions
Taking these meal expense deductions is a three-step process:
First, you must verify that these expenses are legitimate business expenses. Some of these expenses are deductible, while others may not be.
Second, you must have the documents to back up the deduction. You don't need to include these documents in your business tax return, but you will need them in case of an audit.
Finally, you must determine if you can take the full amount as a deduction or if the amounts are subject to the "50% rule," which limits the deduction to 50%.
The two ways to determine meal costs are:
- Using actual costs for meals
- Use a standard IRS meal allowance
With either method, you must still keep receipts and track actual costs.
Meal Expenses Deductible at 100%
Some meal and entertainment expenses may be fully deducted. That is, your deduction doesn't have to be limited to 50% on these activities:
- At an event to promote goodwill in the community, like sponsoring a community event (considered as advertising or marketing)
- At an event at which the proceeds go to a charitable organization (check to be sure the charity meets IRS qualifications)
- If the meal is an essential part of your business function, i.e. if you are a restaurant critic, food blogger, or sports reporter
Meals and Entertainment Expenses You Can't Deduct
You may not deduct the costs of meals for personal reasons while traveling. If the trip is "primarily" business, most expenses will be considered as business expenses. If the trip is "primarily" personal and you conduct some minimal business, only those costs directly related to the business you conduct may be deductible.
Where to Show these Expenses on Your Business Tax Return
- For sole proprietors and single-member LLCs, show these expenses in the "Expenses" section of Schedule C. Line 24b is the place to enter deductible meals and entertainment expenses
- For partnerships and multiple-member LLCs, show these expenses in the "Deductions" section of the partnership tax return (Form 1065)
- For corporations, show these expenses in the "Deductions" section of the corporate tax return (Form 1120)
- For S corporations, show these expenses in the Deductions section of Form 1120-S
Keeping Records on Business Meal Expenses
Because meal expenses often happen while you or your employees are traveling, it may be difficult to keep good records, but it's important to record all details about the business purpose for these expenses. Note the business purpose on receipts, use an app or take photos of receipts, and file all receipts so you can show them in case of an audit.
The Bottom Line
Providing meals and entertainment for existing and potential clients and partners can be a great way to network and build your business. But with recent tax laws, there are new limitations when it comes to deducting these expenses. Because state and federal laws change frequently and can be complex, please consult with an accountant or an attorney for current tax or legal advice.
IRS. "IRS issues guidance on Tax Cuts and Jobs Act changes on business expense deductions for meals, entertainment." Accessed July 7, 2020.
IRS. "Publication 535 Business Expenses." Page 9. Accessed June 2, 2020.
IRS. "Publication 15-B Employer's Tax Guide to Fringe Benefits." Page 17. Accessed June 2, 2020.
IRS. "Publication 15-B Employer's Tax Guide to Fringe Benefits." Page 18. Accessed June 2, 2020.
IRS. "Publication 463 Travel, Gift, and Car Expenses." Page 6. Accessed June 2, 2020.
IRS. "Publication 463 Business Travel, Gifts, and Car Expenses." Page 6. Accessed June 2, 2020.