The rules around deducting meals and how much you can deduct can be confusing. It depends on your business, the circumstances, and who you're paying for.
What Qualifies for a Meal Expense Deduction
Here are the criteria the IRS lays out to help you determine if the meal expense is deductible:
The expense is ordinary (common and accepted in your trade or business) and necessary (one that is helpful and appropriate for your business)
The expense is not lavish or extravagant under the circumstances
The taxpayer, or an employee of the taxpayer, is present during the meal
The food and beverages are provided to a current or potential business contact
If a meal is provided at an entertainment activity or event, then only food that was purchased separately and shown on its own bill, invoice, or receipt is deductible. For example, if you take a client to a baseball game and purchase food and beverages from a stand then you can deduct that meal expense since it wasn't included in the price of the ticket and you have a separate receipt for it. If you rent out a venue where food and beverages are provided as part of the package and not separated on the invoice then you cannot deduct the meal expense.
How Much Can You Deduct for Meals?
If your meal meets the qualifications for a deduction, the following limits apply:
Temporary 100% deduction for meals from restaurants
Due to COVID-19, the rules on deducting food from restaurants have changed. As part of the Consolidated Appropriations Act, food and beverages purchased from restaurants will be 100% deductible from December 31, 2020, until January 1, 2023.
The IRS defines a restaurant as "a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business's premises." This allowance does not apply to businesses that primarily sell pre-packaged food or beverages not for immediate consumption, such as grocery stores, convenience stores, vending machines, etc.
50% Limit
Generally, without the temporary 100% deduction for meals from restaurants, you are able to deduct 50% of business-related meal expenses, including tax and tips. This limit applies to employers, employees, and self-employed individuals (including independent contractors).
This includes:
Meals with clients or customers for business purposes
Meals at an entertainment activity when the food is paid for separately
Meals while traveling for business
Meals at a business convention
In some cases, your entire meal might not be deductible. This can be the case if part of your meal is considered "lavish or extravagant under the circumstances" or you pay for someone who isn't a business client, such as a friend or spouse, on the same bill. If this is the case, you will need to determine which portion of the bill is deductible and apply the 50% limit only to that portion.
Exceptions
Here are some common exceptions where you may be able to deduct 100% of the expense:
The meal expense is treated as compensation
The meal is for a recreational, social, or similar activity, such as a company party or picnic
You provide the meal to the general public as a means of advertising or promoting goodwill in the community
If you're subject to the Department of Transportation's "hour of service" limits, then you may be able to deduct 80% of meal expenses.
Recordkeeping for Meal Expenses
You don't need to attach documentation on your tax return for meals, but you should keep accurate and complete records in the case of an audit. It's important that you can verify that these are legitimate business expenses. The documentation should include:
The date
The amount paid
The name and location of the meal
The purpose of the meal
The business relationship of those present
Typically, this documentation can include a receipt, canceled check, account statement, credit card receipts and statements, and invoices.
Need help determining if your meals qualify for a deduction and recording your expenses? Give us a call at (360) 756-5020 to speak with one of our bookkeepers and see how we can help you.
Disclaimer: This post is meant for informational purposes only and should not be taken as legal, business, or tax advice. Please consult with your accountant or bookkeeper for more information based on your specific situation. For more information, please read through the following resources: