Deducting Meals (Not Entertainment) as Business Expenses
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. There may be changes and notifications by the IRS related to this deduction; check with your tax professional before taking a deduction.
Entertainment Expense Deductions Eliminated
The major change in business expense deductions in the tax law is the elimination of entertainment expenses, effective with the 2018 tax year. No more deductions for taking a client to a sporting event, concert, or resort.
Meal expenses are still deductible, with some changes.
- Meals during entertainment events are deductible if they can be separated out (like a catered meal delivered to a skybox at a sporting event).
- 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%).
Taking Deductions for Meal Expenses
Taking these 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. I'll explain more about what's deductible and what's not.
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%.
Here are the details.
How to Deduct Meal Expenses
You may deduct 50% of costs for business meals, whether you are just going to lunch with a customer or traveling out of town. The two ways to determine meal costs are:
- Actual costs for meals
- Use the standard IRS meal allowance
With either method, you must still keep receipts and track actual costs. You can find the standard meal allowance (called the "Meal and Incidental Expense" rate (M&IE) for most major U.S. cities in IRS Publication 1542 (Per Diem Rates).
More Guidelines on Deducting Meal Expenses
- The meal costs must be "ordinary and necessary" business expenses
- The costs may not be "lavish or extravagant"
- An employee of your company must be present at the meal
- if the meal is at an entertainment event, the meal must be separately priced.
The IRS has clarified the test for deducting business meals. To qualify, there must be a current or potential business relationship between the people at the meal. Be sure to include a note on your meal receipts. (IRS Notice 2018-76).
Meals as business expenses must meet one of two tests:
- The directly related test applies if you can show that the main purpose of the activity was business. For example, if you are meeting with clients in your office, meal expenses during the meeting would probably meet the "directly related" test.
- The associated test applies if the expense is associated with (along with, in conjunction with)a "substantial" business discussion. For example, if you had a meeting with clients at a restaurant and then you take the clients to the theater, this might satisfy the "associated" test.
Included in the 50% limit are taxes and tips relating to a business meal.
Meal and Entertainment Expenses Not Subject to the 50% Limit
You may deduct meals provided to employees. If the food or beverages you provide to employees qualify as a de minimis benefit (that is, they are small amounts provided occasionally), you aren't held to the 50% limit. You can deduct the full cost. Examples of de minimis food and beverages for employees might be coffee and donuts at a staff meeting or an occasional pizza if employees must work overtime. The deduction limit on meals is discussed in chapter 2 of IRS Publication 535 - Business Expenses. If the expenses aren't considered to be de minimis, they are subject to the 50% rule.
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.
- At an event at which the proceeds go to a charitable organization (check to be sure the charity meets IRS qualifications)
- If the meal or entertainment is an essential part of the business function, as with a restaurant critic, food blogger, or sports reporter.
- For meals for employees at the convenience of the employer (as in a case when employees must work overtime), or for an occasional event, like the annual employee picnic.
The IRS clarifies "convenience of the employer" to situations in which the meals "are necessary for the employee to properly discharge the duties of a particular job position." Employers can charge employees for the cost of meals up to the cost to your company. If the meals meet this qualification they are not taxable to the employee.
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.
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. Enter the 50% amount here.
- For partnerships and multiple-member LLCs, show these expenses in the "Deductions" section of Form 1065
- For corporations, show these expenses in the "Deductions" section of Form 1120.
- You may use per diem rates for figuring travel expenses within the U.S., based on IRS Publication 1542-Per Diem Rates. This publication lists per diem rates for most major cities in the U.S. and updates these rates periodically.
- Note that the 50% limitation also applies to the standard meal allowance When you list all meal costs in the appropriate line in Schedule C, for example, the 50% limit is then applied, so that the total of all meal costs is reduced by 50%.
Keeping Records on Business Meal Expenses
Because these expenses often happen while you 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 information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.