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:
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 50% deductible, a business meal requires a business purpose. A legitimate business purpose is 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 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 picnics
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 paid or top employees like owners and managers. You need to invite all employees to the event. It can be primarily for the benefit of employees even if others such as spouses are invited. You cannot deduct any costs related to entertainment.
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.
Meal costs you incur while traveling for business are 50% 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.
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.
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.
Entertainment is no longer deductible
Under the new Tax Cuts and Jobs Act enacted beginning 2018, entertainment expenses are no longer deductible. 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 in order to deduct the meal portion. Invoices and receipts that combine food and entertainment with no separation between them are not deductible.
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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Jennie Schottmiller, LMFT, CPA is a licensed marriage and family therapist who practiced as a CPA prior to becoming a therapist. She has an active solo therapy practice and runs a facebook group for clinicians and offers courses to help small business owners with accounting, tax and financial analysis matters.
Disclaimer: This blog is for education only. Please consult with a qualified professional when you have any questions about your personal accounting, tax or legal situation. Information contained in this post is for informational purposes only and not intended to replace professional advice.