Deducting Meals as Business Expenses
How New Rules Can Affect Your Business Taxes
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. However, there are limits to what you can deduct. For example, entertainment costs aren't deductible, while some meal expenses are taxable to employees.
What Are Business Meal Expense Deductions?
Business meals are deductible business expenses, and most meals are deductible at 50%, but entertainment expenses are not deductible as a business tax expense.
The 50% limit applies to both your business and your employees, including meals as part of business travel or at business conventions or professional meetings.
As a temporary exception to the 50% limit on deductions for food or beverages, your business can deduct most business meals at restaurants and bars at 100%, beginning January 1, 2021, through December 31, 2022. The facility must prepare and sell food or beverages to retail customers for dining in or take-out meals, and the business owner or an employee must be present. This increased deduction can't be taken for grocery stores and convenience stores. or employer-operated eating facilities.
Qualifying for Meal Expense Deductions
Your business can generally deduct the cost of business meals at 50% (or 100%, for the temporary 2021/2022 exception) 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).
- The meal has an "ordinary and necessary" business purpose.
Since entertainment is not 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 and invoiced separately).
Meals 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:
- An event to promote goodwill in the community, like sponsoring a community event (considered as advertising or marketing)
- 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
Meal Expenses You Can't Deduct
You may not deduct the costs of meals for personal reasons, including 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.
Deducting Business Meals for Employees
Your business can deduct the cost of meals for employees while traveling and for meals with clients or customers at 50%, but you can take a 100% deduction for some meals provided to employees, including:
- Meals with value you include in an employee's wages
- Meals as part of social events, like a holiday party or annual picnic
- Meals for employees at your location (at your company's cafeteria or break room, for example)
Meals for Employees as Fringe Benefits
Some meals you give to employees are considered benefits, so they are taxable to the employees, and you must report these benefits on their W-2 form. But, as an exception, some of these meal benefits must be included in the wages of key employees or highly compensated employees (5% share 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.
De Minimis Rules
You don't have to include the cost of meals to employees if these costs are small (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.
Other Meals for Employees
Employees are not taxed on the value of meals that your company furnishes your business location and for your business convenience. These meals must be for your business convenience. For example, if you give meals at your cafeteria to employees who must be available for emergency calls, the meal cost may not be taxable to them.
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. You may be required to give the IRS specific reasons and documentation.
How to Take Meal Expense Deductions
Taking these meal expense deductions is a three-step process:
- You must verify that these expenses are legitimate business expenses. Some of these expenses are deductible, while others may not be.
- 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.
- 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%. Remember that meals at restaurants, bars, and other eating establishments may be deductible temporarily at 100% through 2021 and 2022.
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.
Here's where to include meal expense deductions 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.
- 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 1120S.
Business Meal Deduction FAQs
What documents do I need to prove a business meal expense?
You must have what the IRS calls "adequate evidence." That means a receipt from the place where the meal took place. A canceled check isn't enough. Make sure the receipt includes:
- The name and address of the place
- The date of the meal
- The number of people served
- The date and amount of the expense
Then, add the names of everyone dining with you and their relationship to your business and business purpose to the bottom of the receipt.
There are expense tracker apps you could use to keep track of business meals and other on-the-go expenses.
What if I don't have the documents to prove the meal expense?
If you don't have complete records to prove a meal expense, you may need to give an oral or written statement with specific information in addition to other supporting evidence. You may also be able to get acceptable proof by sampling, with records for part of the year used to prove similar situations for other parts of the year. For example, if you take a specific client to lunch every month, you might not have to show every receipt for the whole year.
If your records were lost or damaged in circumstances beyond your control—in a disaster, for example—you may be able to prove a deduction by reconstructing your records or expenses.
What's a reasonable amount for a business meal deduction?
The IRS doesn't restrict the cost of a business meal to a specific amount, even if it is at a deluxe restaurant or a resort. Meals can't be "lavish or extravagant," taken on a case-by-case basis and looking at whether the meal cost is reasonable based on the facts and circumstances.
Because state and federal laws change frequently and can be complex, and every business situation is different, be sure to consult with an accountant or an attorney for current tax or legal advice.