Meals and Entertainment – Surprise it’s Only 50%
When business owners think of meals, they have many questions.
If I own a business: can I deduct my meals, are food purchases during a conference covered, can I have a company party? If I take a potential client to a restaurant, is that deductible? Can I buy lunch for myself every day?
These can fall into different categories of meal deductions and thus have their own tax rules. Business meals are one of the most commonly misunderstood topics. With constant changes to the IRS guidelines, Waterford can understand why business owners struggle to understand the cans and cannot.
Meals and entertainment fall under IRS Publication 463, but we will discuss the highlights here.
What is considered deductible and non-deductible entertainment, travel, and meals?
Let’s say you plan to attend a conference for your specific area of expertise. People would regard the conference ticket as entertainment, while they would consider the flight or car service as travel. And what about food? I will need to eat while I am there.
That example discusses entertainment, travel, and meals. Since travel is also somewhat intrinsic, we will discuss that later.
Entertainment
In general, you can no longer take a deduction for any entertainment, amusement, or recreation expense. This change went into effect in 2018. Entertainment includes ball games, theaters, and any club memberships or dues.
The no deduction also includes any all-inclusive tickets that provide a meal with a show. If the two items are not separated on the receipt, the entirety of the charge is non-deductible. There are a few exceptions to this rule:
One exception is all-inclusive tickets related to attending business meetings or conferences. Those are 100% deductible. So, in our example above, the ticket to the convention would be deductible.
Meal costs can also be divided into direct expenses and per diem or allowance. Let’s evaluate both to determine which is better for your situation.
What is a Per Diem?
A per diem is an allowance or payment made for each day. The Internal Revenue Service (IRS) uses the U.S. General Services Administration (GSA) to determine how much each State’s per diem should be. Per diems do not look directly at how much you spend, so there is no need to keep receipts.
This option is generally for an employer wanting to send their employee to a work-related event away from their tax home. The per diem amount per area is the same whether you spend the entire stipend. This amount can be given as a separate check, included as a separate income line item on a regular check, or reimbursed afterward. Per diem may be the easiest way to maximize your expenses, as shown in our example.
Meals in excess of the per diem can be a 50% deduction.
What meals are covered at 50%?
Most day-to-day meals fall into this category. You do not have to research the area or prepay to use this option; however, there are some rules.
The most common meals fall into the 50% deduction:
• Meals that occur while traveling away from your tax home (whether alone or with others) on business
• or
• Meals at a business convention or meetings are also subject to the 50% deduction rule.
The expense must be ordinary (common and accepted) and necessary (helpful and appropriate) for your business type. Meals purchased for a single employee are not deductible unless under an exception listed below.
Meal deduction for current or potential clients must follow these rules:
• A business member must be present
• Meals cannot be lavish or extravagant
• Meal provided to a client (either current or potential, consultant or business contact)
• There must be a paper trail that does not include an entertainment cost
• It must be in the current tax year
Providing regular meals or meals as a benefit of employment is considered a fringe benefit and is taxable to the employee. Meals are excluded if entertainment and meals occur together and the price is not separated.
What is my tax home?
Your tax home is where your primary business or employment is located. It does not have to be in the same State or general area as your physical family home. If you have multiple locations as a business owner, the location where you spend most of your working time is your tax home.
A “Tax home” means if you and your family live in one State but work in another, you cannot take a deduction for meals purchased while at work. If you do not have a main place of business due to the nature of your work, your tax home could be considered the same as your family home.
If you do not have a principal place of business and you do not have a place where you regularly live, you are considered an itinerant , which means you are not allowed to deduct any of your meals.
What meals fall under a 100% deduction?
From December 31, 2020, to January 1, 2023, all meals that were purchased from a restaurant and consumed on the premises were 100% deductible for businesses. The Consolidated Appropriates Act 2021 was created to help stimulate the restaurant business and help business owners with a tax deduction. Since we are now past that time frame, let’s look at additional exceptions to the 50% limit.
Additional 100% Exceptions
Recreational expenses for your employees, such as a holiday party or summer picnic, including the venue, are not limited to the 50% rule or excluded with the entertainment exclusion. However, the company must invite every employee.
Purchases made for the office include snacks, coffee, water, or sodas.
If you provide meals to the public as a form of advertising or business promotions, those meals are also not subject to the 50% limit. Similarly, if you own a restaurant or food business, there is no limit on food and beverages purchases.
Self-employed individuals are not limited to a 50% deduction if all the following are true:
• The expenses are incurred as an independent contractor
• Your customer or client reimburses you or gives you an allowance for expenses connected to services you perform
• You provide records of these expenses to your client
One of the more uncommon exceptions is charitable sporting events. If you purchase a package deal that includes a charitable event and all of the following are true, you can take the total cost you pay for the ticket, even if it is more than the face value.
• The event’s primary purpose is to benefit a qualified charitable organization
• The entire net proceeds go to the charity
• The event uses volunteers to perform all of the event work
A qualified charitable organization is tax-exempt under section 501(c)(3) of the Internal Revenue Code. To be considered tax-exempt, any private individual or shareholder may use none of its earnings, and the organization cannot operate to benefit private interests.
Lastly, individuals subject to hours-of-service limits could deduct meals at 80% if the expense occurred while traveling away from their tax home. These meal expenses are typically for transportation business purposes.
In conclusion, meals and entertainment are the worst tax deductions you could use for your business. Most areas of entertainment are not deductible, and most meals are only a 50% deduction. Being one of the most restrictive deductions, we recommend keeping the paper trail for all deductions and avoiding any activities that could be considered fringe benefits. Random audits are common. Once selected for an audit, an IRS agent could heavily investigate the meals and entertainment deduction even if taken correctly. If you are looking to maximize your business deductions, please get in touch with us.
Check out our youtube video Meals And Entertainment Expenses – What’s Tax Deductible For Your Business? with James to give you a first hand recap.If you are still determining which plan works best for you or need additional help or have any questions, Waterford Business Solutions is happy to help. Feel free to call us at 864-351-0852 or email us at Info@WaterfordBusiness.com.
