Business Meals and Parties: Full vs. Partial DeductionsDec 20, 2019
Meals you have with others for a legitimate business purpose are generally 50% deductible. The rationale is that although your meal is for a business purpose you still need to eat. The IRS does not allow personal expenses as business deductions, so to keep it simple they allow 1/2 of the cost to be deducted splitting the difference between personal and business. However, in some cases you can fully deduct the cost of meals for yourself, employees or others in the course of conducting business.
The following IRS Publications address the deductibility of meals and related expenses:
New for 2021/2022
For the years 2021 and 2022, business meals and travel meals that would be 50% deductible, can be deducted 100% if the food comes from a restaurant. The meal can be consumed in the restaurant or it can be take-out. This change is temporary (for now) and is to help boost restaurant sales as we come out of the pandemic.
Not lavish or extravagant
Meal deductions include the cost of food, beverages, taxes and tips. Beverages can be non-alcoholic or alcoholic. However, the meal and beverages cannot be lavish or extravagant. There is no specific definition of what is lavish or extravagant, it is a subjective determination. Use sound judgment and do not take unreasonable deductions. If audited, you do not want to sound like a teenager trying to justify walking in 2 hours past curfew.
Retain the detailed meal receipt showing what was ordered and paid. The credit card receipt with only a total is not sufficient because it does not show what you purchased. Keep a record of who you dined with and the business purpose of the meal either on the receipt, in your accounting system or in a log book.
To be deductible, a business meal requires a business purpose and not be a personal meal. A legitimate business purpose is a meal with another person for the purpose of conducting business, and it needs to be more than you "mentioned a work thing" during the meal. An example would be a meal during which you share business information or collaborate in a way that will grow your business.
You can deduct meals for yourself alone while traveling out of town on business. But if you are in your home area then personal meals are not deductible. Eating while working is not a business meal and is not deductible.
You can pay for your own meal or for the entire meal including others in attendance as as the meal is business related. If you regularly eat with colleagues and simply take turns paying, that does not create a legitimate business purpose thus the expense would not be deductible.
Parties and picnic meals
You can deduct 100% of the cost of meals during a social event like a holiday party or company picnic if the purpose is to primarily benefit employees. The key factor here is it primarily benefits regular employees, not others and not highly compensated or top employees like owners and managers (defined as those who earn over $135,000 in 2022) or if it primarily benefits those who own 10% more of the company or their family members. You need to invite all employees to the event. Spouses can be invited if you choose. See the entertainment section for how entertainment expenses are handled.
If the party or event is primarily for the benefit of non-employees, such as independent contractors, then there needs to be a legitimate business purpose and the cost of food, beverage, tax and tips will only be 50% deductible.
There are a number of different rules related to meals you can deduct as a business expense.
Meal costs you incur while traveling for business are usually 50% deductible, but for 2021/2022 restaurant meals will be 100% deductible. See IRS Publication 463. These meals also cannot be lavish or extravagant. The business purpose is that you are traveling for business and do not have access to your home or kitchen while away. The rationale is the same as with business meals, while you may incur additional costs eating out, you still needed to eat so the cost is partly business related and partly personal.
As an alternative to meal reimbursement, you can pay yourself and employees a per diem amount which is a daily amount to cover meals and incidental expenses. See the separate blog post for Business Related Travel: What is Deductible.
Other meals not taxable to the recipient
Meals are not taxable to employees or contractors if they are 1) provided on business premises for convenience of the business or 2) the meals are de minimis. You can deduct 50% of the cost of these meals as a business expense, or in 2021/2022 you can deduct 100% of meals that came from a restaurant.
An example of a meal for the businesses convenience is you order dinner so your team can work late and eat quickly, without leaving or taking time for a full dinner break. Note, if you own more than 2% of an entity taxed as an S-Corp and are working as an employee, your meal is taxable as wages even if you did it for the convenience of the business (Note, rather than deducting the S-Corp owner meal and adding it to wages, it would be easier to simply exclude the cost of the owners meal from the deduction and mark that as a personal expense).
The IRS uses the term "de minimis" to mean "so small or insignificant that we don't care." A de minimis meal is one that has little value and impractical to track such as coffee, donuts and drinks. See the blog post Bonuses, Gifts & Fringe Benefits: Taxable and Deductible for further discussion on de minimis fringe benefits.
Meals as part of an event for the public
You can deduct the full cost of meals you provide to the public. If you create a training event or hold an open house, whether or not you charge for admission, the food related costs are fully deductible as a business expense.
Under the new Tax Cuts and Jobs Act enacted beginning 2018, entertainment expenses are no longer deductible unless the primarily benefit W2 employees and meet certain other tests. This means that you cannot deduct entertainment that benefits clients or the public. If you have a business meal, party or event that includes entertainment you need to get a separate invoice or receipt for the food and beverage portion of the cost because the meal and entertainment expenses fall under separate rules, so they cannot be combined. Invoices and receipts that combine food and entertainment with no separation between them are not deductible.
To deduct entertainment expenses for employees you need to show:
- The entertainment was primarily (more than 50%) for the benefit of regular (not highly compensated) W2 employees.
- The majority of employees who benefit cannot be highly compensated employees (for 2022 a highly compensated employee is one who earned more than $135,000) nor can they own 10% of more of the business or be a family member of a 10%+ owner.
- You need to document who attended, participated and for how long.
- That the activity is for a legitimate business purpose such as rewarding employees, boosting morale of employees, build a team environment or similar employee benefits.
If they qualify, these entertainment costs are 100% deductible. See the meals sections of this blog on deductibility of the meal portion.
If you reimburse employees for expenses you will need an accountable plan. If you do not have an accountable plan for employees, talk to your tax preparer to set one up.
Recording partially deductible expenses
For an expense that is partially deductible, you still record the full cost in your accounting records. When you or your tax professional prepares your tax return, you will take a deduction for the allowable portion of meal expenses. Record the partially deductible items in a separate expense account to make it easier to identify and adjust when preparing your year-end tax returns. For example, separate business meals which are 50% deductible from company parties which are 100% deductible.
The rules for meals deductions are detailed and it requires some thought to apply them correctly to your business transactions. Knowing the rules can help you raise important issues and questions with your tax preparer and help you get to the correct answer for tax purposes. It is a relief if you are ever audited to know you accurately applied the tax rules.
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