Understanding Business Meal Deductions for Tax Breaks
Written by: Rinaily Bonifacio
Last updated: 2 May 2023
Table of contents
- What is a business meal
- Proof of meal expense:
- Meal deductions for business travel:
- Are there any meals that can be fully deducted?
- What constitutes a business meal?
- Can anyone deduct meals?
- COVID-19 and the temporary 100 % deduction
- An overview of the COVID relief bill
- Meals that qualify for the 100% temporary expense deduction
- How do the Per Diem rates factor in?
- How to make meal expense deductions
What is a business meal
A business meal is defined as any food or drink that’s purchased for business-related purposes. These meals could be with clients, vendors, employees, or other colleagues that you do business with. The cost of the meal itself, including taxes and tips, can be deducted from your taxes as long as it meets the criteria for a business meal.
Investing in meals and entertainment is essential for your business success, allowing you to meet multiple objectives quickly. It helps build relationships, discuss important topics, and get to know potential customers or partners while providing an enjoyable experience.
Incurring business meals may appear a regular expense, but savvy entrepreneurs know it is possible to write them off on taxes. However, how do you go about doing this?
Rejoice! Business meals are eligible for a 50 percent tax deduction, so you can deduct half the bill the next time you treat your client to dinner and drinks.
Nevertheless, you can't just deduct meals randomly. The IRS has set forth tests and guidelines to help you accurately account for your meal deductions. These include:
- The meal must be in a business context and not be extravagant.
- The taxpayer or an employee of the taxpayer must be present at the meal.
- The expense must be ordinary and necessary under IRC Section 162(a) for carrying on a trade or business.
- Food and beverages must be purchased separately from entertainment if the entertainment activity provides them. The cost of food and beverages must be stated separately from the cost of the entertainment on the receipt or invoice.
- The other party at the business meal must be a current or potential client, business contact, or consultant.
- Business meal expenses must be separated from entertainment expenses, which are no longer tax-deductible under the Tax Cuts and Jobs Act.
Proof of meal expense:
You must provide proof of the cost to claim a deduction for a business meal expense. This can be done through a receipt that includes the restaurant's name, an itemized list of food and drinks, and the number of people present at the table.
Additionally, you should note the name of the person you were with and the business purpose of the meal on the receipt. Using a credit card for payment can provide clear proof of the expense.
However, a written or oral statement with specific information and supporting evidence may be required if complete records are unavailable.
Meal deductions for business travel:
Business travel meals incurred while traveling away from your tax home for business purposes are deductible. As of December 29, 2020, a temporary 100% deduction is available for these meals. All meal expenses incurred during business travel are now fully deductible. To qualify as business travel, you must travel outside the general location of your business, outside city limits, and spend at least one night away from your tax home.
Note: The COVID relief has made it an excellent time to enjoy meals while traveling for business.
Are there any meals that can be fully deducted?
Some entertainment and meal expenses can be fully deducted, with no 50% limit! These activities include:
- Generating public support in the local area by hosting promotional activities and events, such as sponsoring a neighborhood event.
- If your daily life frequently involves dining experiences, such as if you are a food blogger, restaurant reviewer, or sports journalist.
- Events where the proceeds are donated to an IRS-qualified nonprofit organization.
What constitutes a business meal?
Business meals refer to the expenses incurred by a business entity in conducting its operations. According to the Internal Revenue Service (IRS), business meals must be ordinary and necessary expenses that are not lavish or extravagant. These expenses must be regular, accepted in your business, and helpful to your trade.
The following are the main types of business meals:
1) Meals with consultants and colleagues:
Business owners often meet with consultants or colleagues to discuss upcoming projects or business strategies. If you must host a conference and take your team out for dinner, the cost is deductible as long as it isn't excessive. An everyday meal necessary for business meetings can be deducted from taxes.
2) Meals with current and potential clients and customers:
Meals with clients and customers can be an effective way to build and maintain business relationships. These meals can be used to discuss business opportunities or other matters related to the business, and as long as they meet the standard and requirements and are not lavish, they may be deductible.
3) Meals while traveling for business more than 50 miles away from home and for more than 8 hours:
Business owners who travel for work may incur food, beverages, tips, and taxes expenses. If these expenses meet the ordinary and necessary requirement, and the travel is for business purposes, they may qualify for a deduction.
In addition to these main types of business meals, other kinds of business meals may be tax-deductible:
4) Meals provided for advertising and goodwill:
Business owners may provide free snacks or food items in the waiting area to create goodwill and promote their business.
5) Meals provided for the convenience of the employer to employees:
Business owners may provide meals to their employees to encourage them to stay late or come in early or to avoid leaving the workplace for lunch. These meals must be provided for the employer's convenience, not as compensation or additional pay.
6) Meals for celebrations and boosting morale:
Business owners may provide meals for company events, such as holiday parties, picnics, or retreats. These meals must be reasonably priced and meet standard requirements. They can be an effective way to boost employee morale and foster a positive work environment.
7) Meals provided to employees for small conveniences under the de minimis rule:
Business owners may provide small meals, such as breakroom snacks or coffee, to their employees. These meals must be provided under the de minimis rule, which means they are occasional and small in value.
Can anyone deduct meals?
Unfortunately, the answer is no. Employers with with 2 jobs cannot claim deductions for business meals.
Self-employed entrepreneurs and business owners can benefit from deductions on their company meals, regardless of industry. Manufacturers and property renters alike can benefit from this tax deduction when it's time to file their taxes!
COVID-19 and the temporary 100 % deduction
The pandemic caused by the Coronavirus has been particularly devastating to the hotel and hospitality industry, with millions of restaurant and hotel staff being laid off around the globe.
In the US alone, the restaurant industry has faced tremendous losses due to COVID-19; within its first year of occurrence, more than $280 billion in sales were lost, according to the National Restaurant Association.
To help restaurants recover from the effects of the pandemic, Congress passed the Consolidated Appropriations Act of 2021 to allow a temporary 100% deduction for restaurant meals. This amendment overturns the 50 percent cap previously set by tax code section 274, helping businesses offset some lost revenue in these unprecedented times.
With the December 29, 2020, legislation signed into law, Congress hopes to spur restaurant patronage by raising the business meal deduction from 50% to 100%. This will surely provide a much-needed boost for restaurants struggling due to coronavirus restrictions.
An overview of the COVID relief bill
The recent COVID relief bill offers a unique opportunity for businesses in 2021-2022, including exempting the typical 50% deduction limitation on business meals. To make understanding this exception easier, here's a breakdown:
Meals that are 100% Deductible include:
- Meals at restaurants with clients or prospects
- Restaurant meals for required business meetings with employees
- Meals at a hotel meeting room for the chamber of commerce meetings
- Meals at fancy restaurants during overnight business travel
- Year-end parties for employees and spouses
- Golf outings for employees and spouses
- Meals prepared on-premises for the general public during marketing presentations
- Recreational events for all employees
- Meals with prospective clients and customers at a country club after non-deductible entertainment activities.
Meals that can be partially deducted (50% deductible) include:
- Employee meals are served by the in-house cafeteria for the convenience of the employer
- Meals cooked by you in your hotel room kitchen while traveling overnight for business
Activities that are not deductible include:
- Entertainment activities such as baseball and football games with clients and prospects
- End-of-year parties for customers that are classified as entertainment
- Golf, theater, or football games with clients or customers.
Meals that qualify for the 100% temporary expense deduction
To ensure everyone is on the same page, the IRS has released helpful directives to explain when taxpayers can take advantage of a total 100% deduction and when they are bound by the 50% pre-existing limitation.
The Consolidated Appropriations Act (P.L. 116-260) has established a temporary exception to the 50% limitation for restaurant food and beverage expenses incurred between December 31, 2020, and January 1st of, 2023. Specifically, Section 274 n(1) states that any expenditure made on meals or drinks would generally be limited from being completely deductible unless this two-year timeframe is considered.
To qualify for the 100% temporary expense deduction, a restaurant is an establishment where food and beverages are served in preparation to be consumed immediately, regardless of whether or not customers dine on-site.
Grocery stores, convenience stores, drug stores, and liquor stores are ineligible for this deduction since they offer pre-packaged foods and drinks that are not meant to be consumed immediately.
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How do the Per Diem rates factor in?
Every year, the IRS issues per diem rates relevant to distinct areas of America. These rates are valuable for computing taxpayer-backed meal and incidental cost deductions. Utilizing these figures can save you time, money, and energy!
If you're looking to plan your travel costs within the United States, then look no further than the highly convenient and annually updated per diem rates offered by the General Services Administration (GSA).
If you desire to take full advantage of the 100% deduction, ensure that all your receipts are from restaurants instead of convenience or grocery stores. But to still reap some rewards, opt-in for the per diem amount and have 50% of your meals deducted!
To maximize 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 simple and can be completed in three steps. Firstly, you must ensure that the expenses are reasonable business expenses eligible for deduction. Secondly, you must maintain proper documentation, such as invoices and receipts, to substantiate the deduction if required during an audit. Finally, you must determine if you can claim the total amount or if it is subject to the 50% limit, except for meals at restaurants, bars, and other eateries, which are temporarily deductible at 100% in 2021 and 2022.
The three steps in bullet points are:
- Verify that the expenses are legitimate business expenses
- Keep and maintain valid proof of the expenses, such as invoices and receipts
- Determine if you can claim the total amount or if it is subject to the 50% limit, except for meals at restaurants, bars, and other eateries, which are temporarily deductible at 100% in 2021 and 2022.
The business meal deduction is a great way to minimize taxes and save money. However, knowing the IRS's rules and regulations is essential when claiming any deductions. Knowing when certain meals are deductible can help ensure you get the maximum benefit from this deduction. Consulting a tax professional is always wise if you’re unsure what constitutes a business meal or how to make deductions. With the right knowledge and proper documentation, you can successfully use the business meal deduction to save money on taxes.
By following IRS regulations and understanding the temporary 100% deduction for meals at restaurants and bars, you can create an effective strategy for maximizing your allowable deductions. Proper planning allows you to leverage these benefits to reduce taxes and maximize your savings.
Rinaily is a renowned expert in the field of human resources with years of industry experience. With a passion for writing high-quality HR content, Rinaily brings a unique perspective to the challenges and opportunities of the modern workplace. As an experienced HR professional and content writer, She has contributed to leading publications in the field of HR.
Please note that the information on our website is intended for general informational purposes and not as binding advice. The information on our website cannot be considered a substitute for legal and binding advice for any specific situation. While we strive to provide up-to-date and accurate information, we do not guarantee the accuracy, completeness and timeliness of the information on our website for any purpose. We are not liable for any damage or loss arising from the use of the information on our website.
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