As a business owner, there are many times that you may decide to spend money on things that aren’t necessarily “required” to run your business. For example, you may decide to treat your staff to a nice meal to increase workplace morale. Or you may take a potential client to dinner or out to golf in hopes that the investment will translate into new business down the road.
But while you may very will consider these types of costs to be legitimate “business expenses,” the important question is how does the IRS view them? Specifically, does the IRS have a meals and entertainment deduction that can you taken advantage of?
In short, yes, there’s a strong chance that you can deduct some of these expenses from your tax bill. However, recent law changes have limited the number of expenses that qualify for the meals and entertainment deduction? Here’s what you need to know.
Are Meals And Entertainment Expenses Deductible?
When the 2018 Tax Cuts and Jobs Act (TCJA) passed, it imposed new restrictions and limits on the meals and entertainment deduction. Here’s a quick recap of how it worked before the ratification of TCJA and what has changed since.
Before the 2018 Tax Cuts And Jobs Acts, a wide variety of meal and entertainment expenses were both deductible by 50% to 100%. The deductible amount would vary based on the purpose of the expense.
As a general rule, money that was spent on clients or towards travel expenses was eligible for a 50% deduction. On the other hand, if the money was spent to provide meals or entertainment to employees (who weren’t traveling) or to provide a free benefit to the public, there was a strong chance that it could be 100% deductible.
When the 2018 Tax Cuts and Jobs Act passed, it disallowed nearly all deductions for entertainment expenses. This means no more deductions for buying clients movie tickets, rounds of gold, or court-side seats at Madison Square Garden.
However, meals are still deductible from 50% to 100%. It should be pointed out that the lines can get really blurry between “meals” and “entertainment.” For example, you might grab a bag of popcorn at the movies or a hot dog at the ballpark. Would these be considered “meal” or “entertainment” expenses?
According to the IRS guidance, the hot dog you buy at the ballpark would be deductible, as long as it was purchased separately from the game tickets. But what if your ticket included access to food and beverages? In that case, the IRS states that the cost of the snacks and drinks would be considered an entertainment expenditure and would not be deductible.
The one time that entertainment expenses can still be deducted are when they’re primarily intended for an employee’s benefit or included as employee compensation. Examples could include holiday parties, access to the company pool, or expense-paid vacations. These types of expenses may be fully deductible (100%).
What Meal Expenses Are 50% Deductible?
The IRS breaks all meal expenses into two categories. Some are 50% deductible, while others can be deducted in full. Below are a few examples of meal expenses that you can deduct by 50% from your tax bill:
- Meals with clients (as long it’s not lavish)
- Employee meals at conferences (that aren’t included in the ticket price)
- Employee meals while traveling
- Free meals for a few employees or for board meetings
In regard to the deduction for employee meals while traveling, it’s important to point out that the travel must be considered business travel. In simple terms, that means that the majority of the trip must be spent on business activities. Learn more about how the IRS defines business travel.
The new rules around employee meals at conferences could make it more attractive to avoid conference “ticket bundles” that include meals.
For example, imagine that a base conference ticket is $200 per person and the “deluxe” ticket that includes meals costs $400. By purchasing the $200 tickets for each of your employees and paying for their meals separately, a significant portion of your conference cost becomes deductible.
What Meals Expenses Are 100% Deductible?
Wouldn’t it be great to be able to deduct 100% of the money that you spend on food and drink? In a few cases, you can do just that. Below are three types of meal expenses that are 100% deductible:
- Company-wide parties (any meal provided for more than 50% of employees)
- Food and beverages provided free of charge to the public
- Food and drink designated as taxable compensation on an employee’s W-2
Thinking about throwing separate Christmas parties for each department of your company? Tax-wise that might not be the best decision. In order for a company party to be deductible, at least half of your staff needs to be involved. By treating your entire team at one time, you could increase staff solidarity while also saving you money on your tax bill.
However, the meal can’t be for the purpose of feeding employees that are working. To be deductible, it must be primarily for the purpose of recreational or social activities. In other words, a company party is fine. But delivering pizza to employees who you’ve asked to work till 10 pm is a no-go.
But, in contrast, if free breakfast and lunch from the company cafeteria is included in your employee’s benefits package, then the meals would be deductible (100%).
What Meals Expenses Are Non-Deductible?
Any meals that you, the taxpayer, or one of your employers aren’t present for cannot be deducted. In other words, you can’t deduct a comped a meal for a client if someone from your company wasn’t also present at the restaurant.
Any meal expenses paid for friends or family are also non-deductible. For example, if you brought your spouse along for a business dinner, you couldn’t deduct their meal (unless your spouse happens to be an employee of your company).
Let’s say that you bring your client out to a nice meal and decide to bring along your wife and son. For simplicity, we’ll say that each meal cost $25. In this example, you couldn’t deduct any of the $50 spent on your wife and son’s meals. But you could deduct 50% of you and your client’s meals, for a total deduction of $25.
Are There Any Exceptions to These Rules?
Yes, if you’re someone who is subject to the Department of Transportation (DOT) hours of service limits, the percentage
of business meals that you can deduct is 80% rather than the normal 50%. Examples of workers who qualify for the 80% reimbursement percentage include:
- Air transportation workers who must follow Federal Aviation Administration regulations (i.e. pilots, crew, dispatchers, mechanics, and control tower operators)
- Interstate truck operators who fall under DOT rules.
- Some merchant mariners who are governed by Coast Guard regulations
Another notable exception to the normal meals deduction rules applies to daycare workers. If you qualify as a family daycare provider, you can use standard meal and snack rates (in lieu of actual costs) to calculate the deductible cost of meals that you provide to eligible children.
How to Claim the Meals and Entertainment Deduction
If you want to claim the meals and entertainment deduction, it’s very important that you keep your receipts as proof that these expenses were legitimately related to your business in case of an audit.
Business owners and sole proprietors will use Schedule C to claim the deduction. See the IRS instructions for how to fill out a Schedule C. If you happen to be claiming the deduction as an employee, you’ll use Form 1040.
Most online tax preparation tools make it easy to claim the meals and entertainment deduction on the “self-employed” editions of their software. These are our favorite tax software companies of 2020.
Maximize Your Meals and Entertainment Deduction With Cloud Friday’s Help
Want to make sure that you’re getting the most out of the meals and entertainment deduction? Cloud Friday can help! Our complete accounting services can help track all of your deductible expenses so that you can take advantage of all the business tax savings that you deserve.
And that’s not all that our dedicated team can offer. They can also help you balance your bookkeeping, manage your accounts receivables and payables, reconcile cash and credit accounts, and general financial reports. Learn more about how Cloud Friday’s services can save business owners time and money.
Continued Reading: 15 Valuable Small Business Deductions