If you own a business, you may be able to take the meals and entertainment deduction to lower your tax bill. However, this deduction has gone through some significant changes in recent years, so it’s essential to stay updated on how it works. We’ll help you understand what’s currently deductible and how to take full advantage of this tax break.
Background on Meal and Entertainment Deductions
For many businesses, meeting potential/existing customers or vendors/suppliers/partners is important to growth and sustainability, said Eric Nisall, a South Florida-based small business accountant, in an email to The Balance. “Any money you spend in the course of doing business that involves you, as the business owner, or your employee(s) paying for food and drinks qualifies as a ‘meals and entertainment expense,’ ” Nisall said.
The IRS further defines allowable expenses as those both commonly accepted in your industry and helpful for your business. Examples of permissible meals and entertainment expenses include:
- Taking a prospective client to dinner to persuade them to hire you
- Meeting a supplier for drinks to negotiate a better price
You must be sure that any expense you deduct isn’t considered “lavish.” The IRS doesn’t stipulate a specific dollar amount limit, but relies on your judgment of what’s reasonable given the circumstances.
If you’re not sure if an expense would get classified as lavish, check with your accountant.
Changes to Deduction Rules Under the TCJA
The Tax Cuts and Jobs Act (TCJA) of 2017 drastically changed what business owners could write off on their taxes. Here are two ways the TCJA significantly impacted meals and entertainment deductions:
- You can no longer deduct entertainment-related expenses such as tickets to a sporting event. You may, however, deduct the cost of food at an entertainment event if it gets billed separately.
- You can only deduct 50% of the cost of meals provided to your employees via a company cafeteria (previously 100%). After December 31, 2025, you won’t be able to write off this expense at all.
The TCJA does allow for some exceptions. For example, you can fully deduct:
- Occasional meals provided to employees
- Snacks given to workers (since they’re of nominal value)
- Holiday parties or company picnics if all employees get invited to participate
Since TCJA rules can be complex, you should consider speaking with an accountant or tax professional if you need guidance tailored to your specific situation.
Further Changes in 2020
To provide businesses with some tax relief during the ongoing public health and economic crisis, Congress passed the Taxpayer Certainty and Disaster Relief Act of 2020. The Act allows companies to deduct 100% of the cost of business-related restaurant meals consumed from January 1, 2021, through December 31, 2022. Previously, you could only deduct 50% of the bill.
To qualify for the increased deduction, either the company’s owner or an employee must be present when dining. The meal also can’t be considered lavish or excessive in cost. If both conditions don't get met, the standard 50% deduction will apply. The Act also specifies a 50% deduction limit for food from a vending machine or a convenience or grocery store.
Catered meals are a bit of a gray area, so you may want to speak with your accountant about how to best handle those expenses.
What Expenses You Can and Cannot Deduct
After all of the legislative changes, here’s what you can and can’t deduct:
- Business-related restaurant meals (100%)
- Occasional meals for employees included in compensation (100%)
- Office holiday parties and company picnics (100%)
- Snacks for employees (50%)
- Regularly provided cafeteria meals for employees (50%)
- Entertainment or amusement-related costs (i.e. concert tickets, golf games)
Unless amendments get passed, here are two additional changes you can expect relatively soon:
- The increased restaurant meal deduction will end December 31, 2022, returning to 50%.
- The ability to write off cafeteria meals provided to employees will end December 31, 2025.
How To Deduct Your Expenses
According to Nisall, “reporting your business meals expense is very easy” no matter how you file your taxes. For example, if you file Form 1040, you’ll record the amount of your expense on a dedicated line (24b) on Schedule C.
Using tax software simplifies the filing process even further. “Tax programs generally label the input for business meals very clearly and then put the numbers where they belong, so you don't have to worry about it,” said Nisall.
Regardless of your preferred filing method, it’s critical to keep detailed records and expense-related receipts in case you get audited by the IRS.
Nisall says that while oral statements from meal attendees could satisfy an auditor, written records that include the following help your case:
- Who attended the dining event
- How each person is related to your business (employee, supplier, client, etc.)
- What got discussed over the meal (should be business-related)
Nisall also offers some additional insight about receipts:
- If the meal costs less than $75, you don’t need a receipt.
- If the meal costs more than $75, you need a receipt that includes the address of where you dined, the date and time of the event, and the number of diners.
“The IRS has gotten on board the tech-train lately and doesn't require original paper proof, so you can take a picture or scan your receipts and keep digital records,” Nisall said.
Frequently Asked Questions (FAQs)
How do you prove expenses for the meals and entertainment deduction?
You can prove expenses for the meals and entertainment deduction by keeping detailed records about every business meal, and retaining receipts for dining experiences exceeding $75. Then, if you get audited, you can provide the documentation to the IRS.
Where do I deduct meals and entertainment on my tax return?
If you’re a sole proprietor, you’ll deduct meals and entertainment on Form 1040, Schedule C, line 24b. If you’re in a partnership, you’ll report those expenses on Form 1065, Schedule Other Deductions.
How much can I deduct for business meals?
You can deduct 100% of restaurant meals through December 31, 2022. You can also write off 50% of snacks and 100% of occasional meals provided to employees. In addition, until December 31, 2025, you may deduct 50% of cafeteria meals you provide to employees.