If you run a business, you can usually deduct your food and beverage expenses (more on the specifics in a minute) as long as they're related to your trade or business.
But there’s a catch.
As of the 2023 tax year, you can only deduct up to 50% of those expenses. Back in the good ol’ days of 2021 and 2022, you could usually deduct 100% of those expenses. But that provision’s now run out.
Back in 2018 when the Tax Cuts and Jobs Act went into effect, entertainment, amusem*nt, and recreation expenses for clients and business associates were jettisoned from the list of costs you could deduct.
What’s worse is that the rules for what qualifies as a business meal vs. one for entertainment are still pretty murky. However, the IRS has said it’ll release some proposed regulations to clarify the differences.
So, let's talk about what you can deduct. According to the IRS, you can deduct 50% of your business meal expense if:
- The expense is ordinary and necessary for your trade or business.
- The expense is reasonable and not over-the-top given the circ*mstances.
- You, or someone from your business, are present when the food or beverages are provided.
- The food and beverages are given to a current or potential business customer, client, consultant, or someone similar in the business world.
- The costs for food and beverages provided during an entertainment activity are purchased separately from the entertainment or clearly stated as a separate cost on the bills, invoices, or receipts.
Also, putting on something like an annual office holiday party, picnic, or team-building event is 100% deductible. It does need to be a unique event that is quarterly or annual and can’t just be for your top employees. In other words, you can’t have an office holiday party every week.
Now, proving that your expenses qualify for the deduction is just as important as meeting the criteria. You can't just make reasonable estimates. You'll need to establish the amount spent, the time and place, the business purpose, and the relationship of the individuals involved. So, make sure you’re keeping solid records of each business meal to justify its business connection. If your expenses are $75 or more, you'll need proof — like receipts or bills.
Also, keep records of who was involved in the business meal (client, potential client, employees, etc.) and what the business was for (what project, training/mentor, planning that occurred, etc.) If you don’t keep receipts, track that info in the memo when you’re recording the expense in your books. Also, it’s not a bad idea to have three accounts: one for 100% meals, another for 50% meals, and another for entertainment and non-deductible meals.
Extra Nitty-Gritty Bonus Details
- In most cases, your drive-thru morning coffee is not tax deductible unless it is for clients or staff. So, no Starbucks unless you and your business partner enjoy that hot cup of joe to discuss business. Then, it’s 50% deductible.
- Your solo lunch or dinner is also usually not deductible. But, like the coffee, you can deduct half if you’re discussing business with your partner or an employee. If you’re traveling a reasonable distance from your home, you can deduct 50%.
- Food and drink for public goodwill is deductible. So, if you put on a seminar or open house and buy coffee and doughnuts, those are 100% deductible.
- Meals charged to clients are 100% deductible.
- If a meal is included as part of an employee or subcontractor’s income, it’s 100% deductible.
Questions about meal deductions for your business? Let us know.
