As a business owner, there are certain circumstances when you may be able to claim a meals and entertainment deduction. This can come in handy if your business brings you frequently into restaurants or has you joining meals and entertainment with your client.
Still, what counts as meals and entertainment expenses? Can you get business entertainment deductions as well, or are only meals included? Well, the Jobs Act has certain aspects that you will want to keep in mind when deducting meal and entertainment expenses.
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Yes, you may claim meals and entertainment deduction when filing at the end of the tax year. Deductibility changes every year; what is a fully deductible expense now may not have been so in the past. Here are some examples of what you can deduct:
Entertaining clients is not deductible - such as, taking them to a golf game or buying concert tickets. Only entertainment expenses that were included in the taxable compensation would be 100% deductible.
Deducting meals and entertainment might be tricky, as people may not know what is fully deductible. A rule of thumb is this: if you are discussing business and you are at a restaurant, the chances are that you can get a full deduction for that.
It is still advisable that you get a professional adviser to help you calculate your tax break - especially since you will have a lot of business meals to handle. They know the tax code better and should have an easier time associating the information.
Remember that trying to claim something that you are not entitled to can lead to a penalty. When in doubt, you should always go for a tax advisor or at least take advantage of the IRS guidance. Read more on other write-offs you can claim with our cheat sheet for tax deductions.
In order to deduct your expenses, you first need to determine exactly what a meal and entertainment expense is. Here are the definitions you need to familiarize yourself with.
As one may guess, this one involves food and drinks. For example, you may put breakfast, lunch, brunch, snacks, and dinner here. Basically, a meal is everything that you eat or drink for nourishment - which makes this definition pretty simple.
The cost of this is also simple. An expense means the full cost of a certain item during a business meal. This may include delivery tax, sales tax, and tips.
There may be occasional ambiguity about when would meals be considered deductible expenses, so here are the reasons that might give it that label:
This one is pretty obvious, and the most commonly deducted reason. If you take an existent client out to lunch or dinner, work will be discussed throughout that meal. You won't even have to pay for the meal of your client or your business associate and you may still deduct it.
If you want to build a business, it's essential to create a network. For instance, if you are trying to convince a prospective customer into signing a contract with you, then you may write that off as a tax return. You won't even need a signed contract for that at the moment.
If you have your own business, this counts as pretty much anyone from your line of business. You may have a meal together and discuss ideas for your business. You may write that off.
When it comes to entertainment, things can get a bit tricky. In terms of tax purposes, entertainment is defined loosely as an activity to provide amusement, entertainment, and recreation. Very often, this can include drinks as well.
This is what makes things confusing for some people. Since entertainment also includes food and drinks, people may not know exactly where it fits for tax purposes. Does it go on meal expenses, or should you apply it to entertainment expenses?
If you asked this question in 2018, the answer would not have mattered. This is because meal and entertainment expenses had the same deductibility. Still, things have changed since 2018.
Now, the deductibility you get will depend on whether it was considered a meal expense or entertainment expense. Meal costs may be fully deductible, but entertainment expenses may not be. This is why you need to familiarize yourself with the rules and requirements.
If you want to get an entertainment tax deduction, very often it would have to be coupled with a meal - but while you may get a deduction for the meals provided, you may not get one for the entertainment.
The IRS has a simple rule: unless it's necessary, you won't get a tax return. Taking your client to Disneyland will not be considered a necessity. Unless you have a very good and legitimate reason for going there of all places, it will not be labeled under entertainment expenses - and therefore, you will not be receiving any entertainment deductions.
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Not every meal that you have in your office counts as a business meal. Here are some business meal deductions that the tax laws may not allow you to claim:
This is pretty much a gray area, but this is a golden rule that you should follow: if you don't need to eat while you are on the job, then it doesn't get a deduction.
Let's say that you are a security officer, and you are not allowed to leave your post in order to grab a snack or eat a sandwich. You are supposed to stay at that post all day, lest the security will be compromised. In that case, snacks are considered deductible expenses.
However, if you can leave the office but choose not to in order to save time, then you may not claim the snacks as business meal deductions. They fall in the category of personal expenses.
Your home office is likely in your tax home - and in order for business meal expenses of this nature to be deducted, you will have to be at least 100 miles away from your home. Since it's probably safe to say your home office is in your home, the Jobs Act does not cover a tax deduction.
One more golden rule: if you're by yourself, then you likely won't get a deduction. Say you want to grab a cup of coffee or a piece of pastry at your local coffee shop. If you are by yourself, it will not be considered a business meal; it's a personal expense.
When you are trying to deduct meals, you also need to know precisely what type of meal you are dealing with. Here are the main types of business meal deductions that every business owner must keep track of.
Business-related restaurant meals can always be written off, as long as they take place in (you guessed) a restaurant. Up until 2018, business meals within a restaurant only received a 50% deduction. However, business-related meals can now be fully deducted if you were at the location and you have the receipt to prove it.
You do not necessarily have to be in a restaurant to get a deduction, as long as you are traveling for business. For it to be considered "travel," you must be at least 100 miles away from your tax home and have at least one overnight stay.
How much you can write off on a business meal will also depend on the location. For instance, restaurant meals are fully deductible. On the other hand, meals gotten from other sources (i.e., the grocery store or that slice of pizza you got at the airport) will only be 50% deductible.
If you provide food company-wide, at the workplace, then you might also fully deduct the meal expenses. Let's say that you decided to hold company picnics for a business project, and the meals provided were taken into the company backyard. In that case, you might get a 100% deduction for the foods and beverages provided there.
This depends on the meal. According to the Consolidated Appropriations Act, food and beverages are 100% deductible, as long as they are purchased from a restaurant.
Certain conditions at the restaurant will have to apply as well. For example, business-related meals cannot be "lavish and/or extravagant" for the deduction to apply. The taxpayer must be present, and the meal has to be provided to a business associate. A business associate means either a client or a customer, in most circumstances.
Lunch boxes and business meals that were purchased from outside the restaurant will only be 50% deductible rather than 100%. The condition is that the taxpayer must be at least 100 miles away from their tax home - for example, on a business trip.
Deducting meals and entertainment is quite easy, no matter how you usually file your taxes. For instance, if you calculate by yourself and use Form 1040, you'll need to write down that amount on Schedule C, line 24b. That section is where you claim tax deductibility for provided meals and entertainment.
If you use tax software, you'll make it even easier for you to calculate employee meals. These programs will label the business meals provided, placing them exactly where they are supposed to go. This means that you won't need to worry about anything, as the program will be taking care of all the calculations.
Bear in mind that regardless of your preferred filing method, you still need to hang on to the receipts for taxes. These will come in handy in the event that you are audited.
In certain circumstances, an oral statement would be enough to satisfy the one doing the audit. With that in mind, you still need to have some written records for the meals provided. These records should include the following information:
When it comes IRS audits and receipts, there are also certain aspects that you'll want to keep in mind. For instance, if the cost of the meal is under $75, there would be no need for a receipt (although it is still recommended you hang onto it).
On the other hand, if the cost goes over $75 - as you would pay for company picnics - then you will need the receipt. The receipt should also include information such as the address where you had your meal, the number of diners that were present, and the date on which the business-related meal took place.
The IRS has now jumped onto the technology train, so you will no longer have to hoard paper receipt after paper receipt to calculate meals and entertainment deductions. All you have to do is to take a picture of the receipt or scan it, and put it in a designated folder on your computer. You might want to keep a backup of it somewhere as well.
Business meals and entertainment expenses can be deductible - whether fully or partially. The only condition is that it has to be an eligible expense and for a good business purpose. Follow the IRS guidelines on tax relief, and it should be easy for you to deduct almost everything.