If you’ve splurged on expensive meals for business associates or sprung for high-priced tickets to sporting events or concerts for clients in the past, take heed: the tax deductions aren’t what they used to be.
Prior to the Tax Cuts and Jobs Act (TCJA) of 2018, businesses could deduct up to 50% of entertainment and meal expenses, provided they were associated with conducting or discussing business. The TCJA eliminated the deduction for most forms of entertainment but allowed taxpayers to continue deducting 50% of the cost of business meals.
In 2021, the Consolidated Appropriations Act (CAA) allowed businesses to deduct 100% of certain business meal expenses in 2021 and 2022. But the deduction was temporary, designed to boost the restaurant industry during COVID.
As of 2023, deductions are now back where they were prior to 2021. The majority of business meals are now 50% deductible, and most entertainment expenses are not deductible at all.
What’s Deductible in 2023
Exactly what is deductible, and to what extent, depends on the circumstances. Following are some general guidelines:
- Food for recreational employee events, such as holiday parties, summer picnics, or team-building events
- Food provided to the public to promote goodwill (e.g., snacks or coffee for customers)
- Food for events in support of a charitable cause
- Meals that are an essential part of your business function (for example, if you’re a food critic or food blogger)
- Meals provided to the employees for the convenience of the employer (e.g., dinner for employees who work late at the office)
- Meals included as taxable compensation to employees or independent contractors
- Meals sold to a client or customer
- Business meals
- Meals provided in-office for meetings of employees, stockholders, agents, or directors
- Employee meals at a company cafeteria if the annual revenue of the facility is equal to or greater than the costs
- Food items, such as soda, coffee, or snacks, for employees
- Meals while traveling for work
- Meals at a conferences
The Internal Revenue Code defines entertainment as “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf, and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips….”
Note that you also cannot deduct the costs of renting out an entertainment facility or the cost of membership dues.
Entertainment and meals that are part of your actual business may be deductible. For example, if you own a piano bar, the cost of the piano player would probably be deductible. Similarly, if you are a food blogger or a theater critic, you should be able to deduct the cost of meals or plays that you are actively reviewing.
You may be able to deduct meals at entertainment events if the costs can be separated. For example, while the cost of renting a room at a country club for a business function most likely isn’t deductible, the cost of catering for that function might be.
Criteria for Deductions
To deduct business meals, you must be self-employed or operating a business. As of 2018, employees with W2 jobs do not qualify for business meal deductions.
Business meals can be deducted only when the taxpayer or an employee is present at the meal along with a current or potential client, business contact, or consultant. Meals for guests, such as spouses, are not deductible.
In most cases, meals must be provided by a restaurant or, in the case of larger events, a caterer, to be eligible. Food purchased at a grocery or convenience store is not deductible.
In all cases, the meal must not be “lavish or extravagant” relative to the business context.
You should keep receipts for any business meal over $75, and you should keep a record of all business meals, regardless of cost. Records should include:
- The date of the meal
- Purpose of the meal as it relates to business
- Names, titles, and affiliations of people who attended
- Name of the venue
- Total amount of the bill, including tax and tip.
How to Report Your Meal Deductions
How you report your deductions to the IRS depends on what kind of business you have. If you’re a sole proprietor or single-member LLC, you can report your expenses on Schedule C. Partnerships and multi-member LLCs should report them on Form 1065. C corporations should report them on Form 1120, and S corporations on Form 1120S.
Don’t Forget the Per Diem
Alternatively, taxpayers can choose to use a per diem, an annually updated tax deduction for meals and incidental expenses incurred while traveling away on business. The amount allowed varies depending on the location of travel. To be eligible, a business owner or employee must be traveling away from home for business.
In 2023, the meal per diem is $74 a day for high-cost areas in the continental United States and $64 a day for lower-cost areas.
Tonneson + Co Can Help
Many lucrative and long-lasting business relationships are nurtured over personal interactions that include meals, drinks, or coffee. These interactions can also help business owners reduce their tax liability, provided they are recorded and reported appropriately.
We recommend working with one of our qualified CPAs to determine which of your business expenses are tax deductible, how much you can deduct, and whether to itemize your deductions or use the per diem method. Contact us today.
Contact us at Tonneson + Co today to learn how we can help.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!