Meals Deductions for Taxes
Taxes are a highly discussed topic when planning business financials. Unfortunately, when it comes down to the details, there are a lot of confusing guidelines and rules for businesses. One of the most common concerns for businesses is trying to understand the correct way to write off meals. Unfortunately, the IRS is constantly changing the guidelines, especially on meals. The last policy change (unrelated to current events) was announced in 2018 to begin in January of 2019. In 2019, IRS guidelines for which meals could be 100% write-offs vs. which meals fall into only a 50% write-off. These are the guidelines that would be followed when filing 2020-2022 taxes. Please note that this is not a fully-encompassing list. It only comments on the most common meals we are asked about.
Types of Meals: The Best Benefits
There are three main events where meals can be 100% written off. The first are large events occasionally held by the company; for example, a holiday party. Guidelines state that all employees must be invited to the event, but they do not all have to attend. The second major event with 100% deductible meals is any event where the food is being served to the public. Those events are tied to the marketing and promotion of the business. The last large category in the 100% deductible meals are any meals that are being directly reimbursed by the clients. This highlights the most common meals that businesses will be able to write off.
Per Diem a Day Keeps Taxes Away
Unfortunately, most day-to-day meals and food purchases are only 50% write-offs. When traveling, most companies assume that travel meals are an expense that the company can deduct. However, it falls under a 50% deduction. The easiest way to maximize your deductible expenses when traveling is to have a per diem rate. A per diem rate is a daily rate paid to the employee who is traveling for all living expenses. The General Service Administration will annually set rates for a daily per diem amount (https://www.gsa.gov/travel/plan-book/per-diem-rates). Another 50% deduction is meals with potential clients, but only if there are five conditions that are met:
- The meal cannot be lavish.
- It is incurred during the business’s tax year.
- A business member must be present, and the client is a current or a potential prospect.
- There is a paper trail for solely the food vs. an entertainment expense.
The final typical 50% deductible meal is office snacks, including meals for meetings.
An Ever-Changing Timeline
While these guidelines were set in place at the end of 2018, going into the 2019 tax year, with an ending date for 2025, where only directly reimbursed food would be a tax deduction. However, it is something that is constantly changing, so we cannot say for certain what the future of meal deductions holds. During the COVID-19 Pandemic, the Consolidated Appropriates Act, 2021, was created to help stimulate the restaurant business and help business owners with a tax deduction (https://www.congress.gov/bill/117th-congress/house-bill/2471/text). From December 31, 2020, to January 1, 2023, all meals that are purchased from a restaurant are 100% deductible for businesses. Restaurants are defined as establishments that do not primarily serve prepacked food. Any office snacks or meals purchased from a grocery store or gas station are still held to the 50% deduction.
Overall, this is a benefit to businesses seeking another tax deduction opportunity. However, companies should not change their behavior when it pertains to meals since it is a temporary change. It would be better to partake in meals on the same level as any other year to not get into a spending habit. For example, suppose the meal guidelines created in 2019 go back into effect at the end of the Consolidated Appropriates Act. In that case, there will only be two more years of any deductions before meals become nondeductible.
