Business meals are a business write off. Sounds simple – can we go home now?
Not quite. This is a popular tax write-off among businesses of all types and sizes. There are two situations in which the IRS gives the green light to expense a meal; if the meal is for conducting business or if the meal occurs during business travel. If you have a meal that falls into one of these categories, the IRS allows you to deduct 50% of the meal – not the full cost – and only with proper documentation.
As with the rest of the tax code, it’s not one-size-fits-all. This is a simplified guide to writing off your business meals. If you want to get specific, IRS publication 463 is where you want to go; it’s a pithy 50-page read. Actually it’s not. Well, it is 50 pages but the pithy part…not so much.
So before ordering the lobster and caviar at your next client lunch, take a look through this article to make sure you’re in compliance.
It seems obvious that a business meal is a business expense, and therefore a business write off. While the full cost of the meal is recorded in your business books, the IRS limits you to deducting half the cost of the meal meaning if a client lunch cost you $200, you can write off 50% of that on your taxable income.
Prior to the Tax Cuts and Jobs Act of 2017 there were even some meals that were 100 percent deductible. With the passing of this new act, this has been virtually eliminated.
Meals While Traveling
When traveling for business, all your meals and food purchases are considered a business expense. The same 50 percent rule from above applies here. The only difference is the IRS gives you two options for accounting for these meals on your taxes. Click here to skip ahead.
There are a few requirements the IRS gives for you to determine if your meal is considered a business write off. From IRS report IR-2018-195:
- The taxpayer, you, or your employee must be present
- The meal must be for a business purpose
- Must be provided to current or potential clients, consultants, or similar business contacts
- Is not lavish or extravagant
You can claim 50% of the cost on your taxes as business expenses to lower your taxable income.
For instance, you could
- Treat current clients for happy hour to discuss possible upgrades in their investment portfolio
- Hold a seminar about your service or product and provide a buffet dinner to lure potential clients
- Keep snacks, drinks, coffee, etc provided for employees or clients on the business premises
These are all examples of deductible meal expenses.
How to Claim it!
To claim it you have to prove it. To prove it you must have adequate records. The IRS is very clear on this topic so its worth complying with. Records are considered adequate if they show
Name of restaurant
To satisfy the third element, more than a receipt will have to be recorded. You can state the business reason for the expense ON the actual receipt. This works great if you use any phone apps to take photos of your receipts.
I take a potential client out for happy hour. I keep the receipt and it shows the date, time, location, and amount of the expense. From there I can write the name of the person I entertained and the business purpose.
I might write, “potential client meeting w/ Gary Neuberger”. Even better, I could add exactly what we discussed, such as “potential client meeting w/ Gary Neuberger re: IRA retirement conversion.” More detail is more better!
The “under $75” Rule
There is a common misconception that if a business meal expense is under $75 then you don’t have to keep records for it. This is not true. The IRS doesn’t require that you keep “documentary evidence” such as a credit card slip, receipt, or cancelled check. However, you still must have records that cover the 5 elements listed above. The records need not all be in one place; you can maintain this requirement with a combination of documents.
To continue my happy hour example…
Using my credit card statement, I could show 4 out of 5 elements: the name and location of the restaurant, as well as the date and amount of the expense. And using my calendar, I could show that it corresponds to a business meeting I had scheduled with Gary Neuberger.
You can see that having the receipt might be easier in most cases to substantiate the write-off but if you haven’t kept timely records, then the IRS gives you some leeway for expenses under $75.
If you’re travelling for business, the IRS says you can write off 50% of your meals. First things first, you must fulfill the IRS definition of business travel before you can start writing off your meals. Travel requires you to lodge overnight or more specifically “sleep or rest to meet the demands of your work while away” from your tax home. Read more about tax homes and travel from the IRS.
There are a lot of if’s, and’s, or but’s when talking about business travel and business travel expenses. There are special considerations for certain industries, modes of travel, etc. Talk to your accountant to see if any of these considerations apply to you and your business trip.
How to Claim it!
Like most tax-related topics, good record keeping is essential. Unlike business meals, you can account for travel meals in one of two ways. Once you choose a method, all travel meals for that year must be accounted for in the same way.
The first method is the same as accounting for your business meals, which is to keep the receipts. Make sure you record the business purpose of your trip on the receipt before tucking it away in your tax box, file, or pile.
The second method is to use a fixed daily allowance, called a per diem, to account for all your travel meals and incidentals. The rates are location-specific, cover all meals and incidentals, and are even parsed out by first/last day and full travel days. These rates are used for government employee travel so can be quite modest. And like the Actual Expense method, you can write off 50% of the per diem rate. You can look up the rates for your business trip in the GSA tables.
One thing to note when choosing to use the per diem meal allowance instead of actual expenses is that you are also required to use the per diem rate for lodging as well. If you stay at nice hotels, this method may not be in your best interest.
Let’s look at an example.
If you were on a 4-day business trip to LA, you would use the following per diem meal allowance:
First day: $48
Second and Third day: $64
Last day: $48
Your total per diem meal expenses would be $224 so you would write-off $112 for meals and incidentals for your 4-day business trip (50% of the total). Note that the first and last day per diem rates are lower. Doesn’t matter if you leave at 6am or 8pm. And remember…
If you choose to use the standard meal allowance once, you have to use it for the entire year.
If you choose per diem for meals then you’re doing per diem for lodging. Lodging rates are also report in the GSA tables here.
A per diem allowance doesn’t account for the actual amount you spent on meals and incidentals so if you do any bookkeeping, you’ll still want to enter your receipt amounts in your books.