How much of my business meal expenses can I claim on my taxes?
When our clients ask us about properly deducting meal expenditures, they're often really asking two questions.
What all can I deduct for meal expenses (or reimbursed meal expenses), and what do I need to do to ensure those deductions are properly recorded for the IRS?
We answer both questions in this post, plus give you a free meal reporting policy template to help your employees request reimbursement while leaving you with good records.
No such thing as a free lunch
Meal deductibility is among the most frequently debated topics when it comes to deducting business expenses, and as a result, it often has the highest reporting burden. Nonetheless, it can help defray the costs of necessary sales trips, team building exercises and similar activities.
Most food and beverage expenditures are 50% deductible. Meals that are for the “convenience of the employer” such as meals for employees when working late or when working through lunch fall under this category. Similarly, meals during both internal and client meetings are 50% deductible. Though this deduction recently also applied to entertainment expenditures, the Tax Cut & Jobs Act of 2018 did away with entertainment-related expenses. Things like shows, golf games, escape rooms and other non-meal expenses, though they might be for your team or part of a training event, are not deductible. Meals that accompany these recreational events, however, are often deductible.
One thing worth nothing for the 2021-2022 tax year is that, due to the passing of a temporary measure as part of the 2020 Covid relief act, business owners may deduct 100% of business-related meals and beverages, including both take-out and dine-in. This expanded deduction continues until the end of 2022.
What qualifies as a deductible meal expense?
It is important for businesses claiming meal expense deductions that the expenditure follows these eligibility guidelines from the IRS:
- The expense is "not lavish or extravagant under the circumstances."
- The "taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverages."
The above can be interpreted to include team-building meals, working lunches, meals during travel and even sales meetings with clients.
As you might guess, the extent to which an expense is lavish or extravagant is loosely defined, especially since it varies with circumstances. Presumably, this allows for deductible meals to be more expensive in more expensive regions than they might be in more affordable ones. Several rounds of drinks might be considered "lavish" or "extravagant," but when accompanied by food, might not be.
The second condition is much easier to achieve: the expense must involve an employee. This includes founders and owners; meals on business trips, sales trips or late at night when at the office, can be deducted (within IRS guidelines) even if it is "just you."
Record keeping is essential
Whether you choose to more aggressively claim deductions for after-hour team events or prefer to conservatively only claim "working meals," sound record keeping is essential in case of an IRS audit. Without records, almost any requested deduction under meal expenses will be immediately rejected.
Good records for meal-related expenses will always feature two things:
- An itemized receipt. Whether this is a physical copy or a screenshot, your record should clearly indicate the per-item cost, as well as tax paid and any gratuities, as these are all deductible as well. Gratuities paid in cash are unlikely to qualify for deduction. Credit card statements, while useful for personal record keeping, will NOT fulfill this requirement.
- Indication of attendees and purpose of expense. This memo rarely needs to be complex: "sales breakfast with John Doe, VP of Sales at Acme" would suffice for a meal shared with a client; "team meal attended by Jane S., Mike D. and Brian M." for a team meal. It should be clear what the purpose of the expense was and who benefited from it.
Good record-keeping comes from good policies
Good record keeping as a sole proprietor or founder is difficult enough, but ensuring sound accounting hygiene among employees, especially with meals, can be quite hard. Fortunately, a good meal expense reporting policy can do the administrative work for you, incentivizing strong record keeping and fiscal responsibility among employees while keeping them fed and happy.
Good meal expense policies should put a realistic limit on total expenditures per meal and per day, and should also provide a clear path for reimbursement. A best practice is to reimburse employees for meal-related expenses as part of payroll. Set clear deadlines for expense reports so employees know when they can expect to be reimbursed.
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