Making Sense of Meals and Entertainment Deductions
Qualified Meal Deductions in 2023
Previously, the IRS temporarily allowed a 100% deduction for meals in 2021 and 2022 to help stimulate the economy during Covid. For small business owners this was a great way to reduce their tax liability for those years. For tax years beginning January 1, 2023, the percentage deduction has been reduced to 50%. There are certain criteria that businesses must follow to be able to deduct these expenses on their tax return. Let’s look at the most common misconceptions and go over the general rules to qualify for meal deductions.
Meals vs. Entertainment
First, lets clear up the difference between meals and entertainment. I think most clients use these words interchangeably which results in them bundling these types of expenses on the same line in their books. Most client will be surprised to know that entertainment is not actually deductible since the passage of the Tax Cuts and Jobs Act in 2017. So, what qualifies as an entertainment expense? Let’s say you take a client golfing or to a baseball game– nondeductible entertainment. The purchase of the membership to the golf club is also nondeductible. Another common example I’ve seen is taking your employees to a venue to avoid employee burn-out, such as a concert. This is also nondeductible entertainment. While your employees might love you, you aren’t going to be able to write that off on your taxes.
I would like to note that there are a few exceptions to the entertainment deduction. The most common exception would be for restaurants and bars. The business owner hires entertainment for their customers, such as a band or magician. This type of entertainment would be deductible for the business owner. As mentioned earlier, this expense would need to be recorded separately from meals.
Meal Deduction Criteria
What qualifies as a business meal expense? The purchase of food and beverages for business related purposes. This could range from having a business meal with a prospective client or providing office snacks and meals for your employees. This includes the cost of the meal with taxes and tip. The business owner or one of their employees must be present at the time the services are provided. That means you can’t send your client to a nice steakhouse and not actually go with them. You would have to be there and talk business to deduct 50% of the meal on your taxes.
Sorry, no caviar and top shelf liquor. The IRS says business meals should not be lavish or extravagant. They also cannot be purchased from grocery stores or convenient stores. So, if you are thinking that you are saving money by buying prepackaged food at the nearest grocery store, you actually won’t be able to write that off. Also, transportation to and from the restaurant cannot be deducted as a meal expense either. Below you will see the deductibility by type of expense for 2023:
Office snacks/meals 50%
Meals while traveling for work 50%
Business meals with clients 50%
Company-wide party (Holiday parties) 100%
Meals included on an employee’s W2 100%
Recording Meal Expenses
The IRS requires that documentation, such as a receipt, be kept if the meal is over $75. However, I think its good practice to save it anyway for adequate evidence. The IRS also requires you to record the date, total amount including tax and tip, the location, and the details of who all was in attendance. You could be asked later what the purpose of the outing was for and who all was there.
It can be hard to differentiate between meals and entertainment, deductible versus nondeductible and qualified exclusions. As you have seen, tax laws are always changing and having a small business accountant that knows the rules helps!