As with many relationships, business relationships are fostered best when sharing a meal, the occasional drink, or just a coffee.
Meals and entertainment are essential for your business growth as they offer you an opportunity to accomplish multiple goals within a few hours.
A self-employed individual or an employee is allowed a deduction for the cost of incidental expenses and costs of meals while traveling away from home for business purposes.
Business meals are numerous and are a recurrent expense. Writing off these expenses is a smart move, but how do you go about it?
The good news is that business meals are 50 percent deductible. This means that every time you take out a client for dinner and drinks, you get to write off half of the bill.
However, you can not go around deducting meals indiscriminately. The IRS has guidelines and tests that help you correctly deduct your meals. These include:
- Considering the business context, the meal must not be lavish or extravagant.
- The taxpayer or an employee of the taxpayer is present at the meal.
- The expense must be an ordinary and necessary expense, under the Internal Revenue Code (IRC) Section 162(a), which is incurred or paid to carry on a trade or business.
- Food and beverages must be purchased separately from entertainment in the case that the entertainment activity provides food and beverages. You must state the cost of the food and beverages separately from the cost of the entertainment on the receipt or invoice. Entertainment expenses are non-deductible
- For a business meal, apart from the taxpayer, the other party must always be a current or potential client, business contact, or consultant.
Business meal expenses should be separated from entertainment expenses as the Tax Cuts and Jobs Act (TCJA) eliminated all deductions for amusement, entertainment, or recreation.
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Proof for meal expense
You will need to provide proof of your meal’s expense. This is in the form of a receipt which should indicate:
- The name of the restaurant, the number of people at the table, and an itemized list of food and drinks consumed and
- On the receipt, you should note the name of the person you were with and the business purpose of the meal.
Checks and credit card statements are clear proof of the expense so it is advisable to charge a business meal to your credit card.
However, if you don't have complete records to prove a meal expense, you will need to give a written or oral statement giving specific information in addition to other supporting evidence.
Note that if you are traveling for business outside of normal office hours and out of town, the meals that you have for yourself are also deductible.
Meal deductions for business travel
Prior to December 29, 2020, all meal expenses were deducted at 50%. But the COVID relief came up with a temporary 100% deduction where business travel meals are included. Simply put, there’s no better time to eat while you travel than now.
Note that a business trip is one where you travel away from your tax home, overnight for business. Sleeping in a hotel near your home does not qualify as business travel. For your travel to be considered as such, you must travel outside the general location of where your business is located, outside city limits. We recommend you use an app to track tax receipts so you can easily organize and export your business meal deductions.
Are there meals that are 100% deductible?
Some entertainment and meals do not have to be limited to 50%, and the expenses may be fully deductible. These include activities such as:
- Marketing and advertising events to promote goodwill in the community, like sponsoring a community event.
- If your normal business function involves meals, for example, if you are a food blogger, a restaurant critic, or a sports reporter.
- Events at which the proceeds go to a charitable organization providing the organization meets IRS qualifications.
What constitutes a business meal?
According to the IRS, all business meals must be ordinary and necessary expenses and not lavish or extravagant. These are expenses that are normal and accepted in your business and are helpful to your trade.
Let’s take a close look at these meals. We have:
The 3 main business meals are:
- Meals with consultants and colleagues.
- Meals with current and potential clients and customers.
- Meals while traveling for business 50 miles away from home and for more than 8 hours.
The other kinds of business meals
- Meals provided for advertising and goodwill provided to the general public such as free snacks in the waiting area.
- Meals provided for the convenience of the employer to the employees. These include meals that you feed your employees to get them to stay late or get in early or so that they do not have to go out for lunch. As such, employees are not taxed on the value of meals that your company provides for your convenience, at your business premises.
- Meals for celebrations and boosting morale such as company holiday parties and company retreats and picnics.
- Meals provided to employees for small conveniences, ‘de minimis’, such as breakroom snacks and tea or coffee for the office. The de minimis rule applies for employee meals at your company cafeteria if the annual revenue of the facility is equal to or greater than the costs.
All meals must have receipts and notes on the receipts about the purpose of the meal. Remember that your regular meals cannot be deducted unless you are away from home on business.
Can anyone deduct meals?
The answer is no. As of 2018, employees with W2 jobs do not qualify for business meals deductions.
To deduct business meals, you should be self-employed or operating a business. Basically, you must be in business to deduct business meals. For example, if you run a manufacturing company or area rental property owner, you are entitled to a business meal deduction.
COVID-19 and the temporary 100 % Deduction
The hotel and hospitality industry was probably hit the hardest by the outbreak of the Coronavirus. This pandemic saw millions of restaurant and hotel employees get laid off across the world.
In the United States alone, the industry lost--within the first one year of the pandemic-- more than $280 billion in sales according to the National Restaurant Association.
With sales still below the pre-pandemic levels in restaurants, the Consolidated Appropriations Act of 2021 determined to impose a temporary 100 % deduction for business meals that a restaurant provides. Congress amended the tax code section 274 to remove the 50 percent cap on meals provide by restaurants.
Signed into law on December 29, 2020, the law changed the deduction for business meals provided by restaurants from 50% to 100%. This was a move by Congress to encourage people to patronize restaurants more.
An overview of the COVID relief bill
The recent COVID relief bill brought a temporary exception to the 50% deduction limitation for business meals for the year 2021-2022. Here’s is a simple breakdown:
Meals that are 100% Deductible include:
- Restaurant meals with clients and prospects
- Employee meals for a required business meeting, purchased from a restaurant
- Meal served at the chamber of commerce meeting held in a hotel meeting room
- Meal consumed in a fancy restaurant while in overnight business travel status
- Year-end party for employees and spouses
- Golf outing for employees and spouses
- Meals made on-premises for the general public at a marketing presentation
- Team-building and other recreational events for all employees
- Meal with prospective clients and customers at the country club following your non-deductible entertainment activity.
Meals that are 50% Deductible include:
- Employee meals for the convenience of the employer, served by the in-house cafeteria
- Meals cooked by you in your hotel room kitchen while traveling away from home overnight
Non-Deductible activities include:
- Entertainment such as baseball and football games with clients and prospects
- End-of-year party for customers, classified as entertainment
- Golf, theater, or football game with your client or customer
Try our free self-employment tax estimator to calculate your tax liability ay the end of the year. Our calculator will estimate your tax bill and help you prepare for the tax season.
Meals that qualify for the 100% temporary expense deduction
To make it clear for all taxpayers, the IRS provides guidance to explain when the temporary 100 percent deduction will apply and when the 50% limitation will continue to apply.
The Consolidated Appropriations Act, 2021, P.L. 116-260, enacted the temporary exception to the limitation for amounts paid or incurred after December 31, 2020, and before Jan. 1, 2023, for food and beverages provided by a restaurant. Under Section 274 n(1), a deduction for any expense for food or beverages is generally limited to 50% of the amount that would otherwise be deductible.
A restaurant in this context is defined as an establishment that prepares food and the beverages are provided for immediate consumption, regardless of whether the consumption of the meal is done on the premises. The meals are the ones that qualify for the 100% temporary expense deduction.
Establishments that provide pre-packed foods and drinks that are not for immediate consumption are not entitled to this deduction. These establishments include grocery stores, convenience stores, drug stores, liquor stores e.t.c.
How do the Per Diem rates factor in?
The IRS regularly publishes per diem rates that apply to different regions of the United States. These per diem rates are useful for calculating the meals and incidental costs deduction which will be presumed to be substantiated, by the taxpayer.
The per diem rates are great for figuring out travel expenses within the U.S. The per diem rates are updated every year by the General Services Administration (GSA).
For the 100% deduction, you must have proof in the form of receipts for taxes to show your expenses were from restaurants and not convenience or grocery stores. However, if you go by the per diem amount, your meals will be 50% deductible.
To maximize on your deductions, consider taking the per diem on a day-to-day basis.
How to Make Meal Expense Deductions
The meal expense deduction process is not complicated at all. The meal expense deductions is a three-step process:
- You must verify that the expenses are legitimate business expenses. Some of these expenses are deductible, while others such as entertainment activities may not be.
- You must have proof of the expense. These documents include invoices and receipts that will back up the deduction. In case IRS auditors review your records, you will need these documents. However, you do not need to include them when you file your tax returns.
- You must ascertain whether you can take the full amount as a deduction or if the amounts are subject to the 50 percent rule, limiting the deduction to 50 per cent. You should remember that meals at bars and restaurants, and other eating establishments are deductible temporarily at 100% in 2021 and 2022.
While the cost of a business meal is not restricted to a specific amount, the IRS still insists on it not being “lavish or extravagant”. This sentiment is subject to facts and circumstances surrounding the business meal. You should look at the cost of the meal and determine whether it is reasonable based on the circumstances and facts.