Being able to write off the cost of food and drink while meeting with clients or traveling for work is a huge perk for business owners. However, just because there is a line item on the tax return for meals and entertainment deductions, not every dinner, theatre ticket, or sporting event involving a client or potential client qualifies as a valid deduction. So, how do you know what meals you can and cannot write off?
The IRS has rules related to meal deductions, and they can be complicated. The following are some rules you should keep in mind when entertaining clients:
- How much can be deducted: Meals purchased while traveling or to entertain clients are generally 50% deductible, while food purchased for the benefit of employees can be fully deductible. You may consider the entire expense, including food, beverages, sales tax, and gratuity.
- You must be truly out of town: In the eyes of the IRS, that means you’re outside or general area where your work is located.
- The business trip must be for a certain amount of time: To qualify as a business trip, the period of time must be substantially longer than a day’s work and you need to rest or sleep while away. So unless it’s exceptionally long, a day trip doesn’t qualify.
- A legitimate activity must be connected to the trip: Traveling for a conference, seminar, trade show, continuing education, or to visit a customer or potential client are all valid business activities.
- For meals as entertainment, you need another person to make it work: There’s no deduction allowed if it’s just you. However, you may write off the cost of your meal when you’re purchasing it along with a meal for a current customer, potential client, or employee.
- There must be business discussion taking place: To write off a meal, there must be some substantial business discussion before, during, or directly after the meal. If you expect to get some income or business benefit from providing the meal, it also qualifies as a deduction. As with travel-related meals, you can only deduct 50% of meals as entertainment expense.
- Meals for employees can be 100% deductible: If you have employees, some of your meal expenses are 100% deductible. For example, the IRS allows businesses to fully deduct occasional small snacks and meals that are purchased for the benefit of employees. Doughnuts and coffee purchased for an office meeting are a perfect example. Lunches and dinners brought in to facilitate working through lunch or working late also count. The cost of food and drink involved in hosting a companywide event – like an annual picnic or a summer outing – are also deductible.
For more details, please see IRS Publication 463 at IRS.gov.
We hope this post helps to provide some clarification on tax guidelines and requirements for meal deductions. If you need help managing any aspect of your business’s or nonprofit’s finances, we want to hear from you. Call us at (301) 913-0008 or email email@example.com to make an appointment.