We’ve all got to eat. In business, we might travel or we might need to feed people working back late. We might be in business where our peak times are around lunchtime and we can’t afford for staff to go off and eat elsewhere. Some of us also need to travel for business. In these situations, what meal and entertainment can we deduct at tax time?
Meals are generally not deductible. They are generally considered a private expense; however not all meals are considered private. There are series of classes of meals that are either fully or partially deductible.
Fully deductible meals
You can fully deduct the cost of meals that are:
- “De Minimis” meals, or of so little value that it is not practical to keep specific fringe benefit accounting for them. Examples include provision of doughnuts, soft drinks or coffee/tea. Irregular meals, eg. a meal due to unexpected overtime. These kinds of meals also include those provided at certain employer operated eating facilities, which you can find more about here.
- meals at the workplace, “furnished for your convenience”. Furnished for your convenience has legal rather than ordinary meaning. Most scenarios covered are where meals are provided for some other reason than simply to provide additional employee benefit. Scenarios include providing lunches for service workers where peak business time is over lunch, or where the majority of your employees are emergency workers on all. There are a range of “furnished for your convenience” scenarios, which you can read more about here.
50% deductible meals
While you may fully expense these meals in your accounts, you can only legally deduct half of the expense. These meal expenses include:
- business meals with clients. One of your employees must be present at these meals and they cannot be lavish or extravagant
- meals while on travel (see below)
Meal expenses are both the billed cost of the meal, plus any associated tips and taxes. If the meal can only be deducted at 50%, this 50% rate applies to tips and sales taxes as well.
If you advance money, or pay reimbursements to employees for these expenses, documentation requirements, including the need for an accountable plan apply. See the Documentation section below for more detail.
Your travel for legitimate business purposes is deductible. This does not extend to your partner or children or anyone else, unless they are also on legitimate business travel. It’s legitimate for them if your presence is not relevant for their travel. For example, your partner is: firstly an employee of the business; secondly traveling with you to a business meeting; and thirdly playing an important part in that meeting.
Travel means traveling away from home. Check the IRS definition of what that means here, in general it means you would expect a period of away from your normal area of work or home. If you are itinerant, you are not traveling for tax purposes.
Meals while traveling are generally claimable at 50%, like other meal scenarios covered above. The 50% rule applies to your meal, but also for food for clients and associates with a business purpose. It doesn’t extend to entertainment (see below), which includes meals not seperatly identified.
Mixed personal and business travel
Some travel might be for a mixed purpose – both business and private. What you can deduct depends on the primary purpose of the trip:
- for business trips, all business expenses can be deducted (subject to non-entertainment meals at 50%). Additional costs related to the private side trip are not deductible. Essentially what can be deducted is what would have been incurred if the private side trip didn’t happen
- for private trips with a business add-on: nothing can be deducted, except for what is directly related to business. If the business element is only a few hours in a city you are in anyway, for example, it would mean no accommodation costs would be deductible
Travel outside of the United States
Additional rules apply if you travel outside of the US. If your trip is deemed entirely for business, the normal rules apply. Presuming the principle purpose of your trip is business, then your trip is deemed entirely for business if:
- you spend all your time on the trip on business matters
- your trip was arranged “out of your control”
- you were outside the US for less than a week
- you were outside the US for more than a week but spent less than 25% of your time on non business activities, or
- a vacation was not a major consideration of the trip
You can generally not deduct any expense that was specifically for private activities, even if your trip is deemed entirely for business.
If your trip is not deemed entirely for business, then if still primarily a business trip, you have to apportion your expenses between business and private. You do this using travel allocation rules, which you can find more detail here.
What travel expenses are deductible?
Here’s a quick list. The IRS provides a more comprehensive list.
- transportation costs, but cruise ships are subject to special limits
- local transportation such as taxi fares to/from the airport or to business meetings or sites
- meals at 50%
- incidentals and tips
Keep supporting documentation of all of your expenses, such as receipts and invoices.
Since 2018, the rules about entertainment deductions have changed. You generally cannot deduct entertainment or recreation as a business expense. This rules out all kinds of entertainment such as corporate boxes, golf course green fees and tickets to the opera. It also rules out extravagant meals. You can still have your business pay for such things, it’s just that you’ll get no reduction in your corporate income tax.
If entertainment includes meals, these meals might be deductible. See the Meals section above for more detail. The meal expense must be separately identified on the bill.
You can deduct entertainment expenses that you report as your employee’s income. This is because you recognize it as a fringe benefit provided. It follows that their tax situation is no different than if you simply paid it as ordinary income and they purchased the benefit.
You are also able to deduct infrequent entertainment, such as a summer business party. There are a few other limited exemptions. See IRS details of these exemptions here.
Documentation and other IRS requirements
Document all travel and non entertainment meal expenses. If they aren’t, then any amounts you pay to employees, either by advance or reimbursement, must be treated as their income. In order to avoid this, ensure that all provisions are according to an accountable plan. An accountable plan requires:
- you give advances to employees no more than 30 days before they expect to incur costs,
- employees keep documents, such as receipts, to substantiate their expenses. They then report within 60 days of incurring the expense,
- you give employees notice of their outstanding balances at least quarterly and any outstanding advances are repaid within 120 days of them incurring expenses
IRS Tax rules about meals, travel and entertainment are complex. In general, don’t deduct most meals; however, you can deduct certain classes of meals, either in full or at a part rate. Genuine business travel can generally be deducted in full for non itinerant workers, except for meals which are 50% deductible. The rules about entertainment are simpler. You can’t, in general, deduct entertainment, including meals not separately identified on the bill.