While most business owners know that one of the perks of owning a business is the ability to deduct your business-related meal expenses, in practice, meeting the IRS’s requirements for meal deductions isn’t as simple as just charging the meal to a business card. There are a number of criteria that must be met in order for the expense to be deductible, but if you deduct business meals in good faith and keep accurate records, you can maximize your tax savings while being ready for any IRS scrutiny in the future.
Prior to 2020, most business meals generally qualified for a 50% deduction, but on December 27, 2020, the government enacted the Taxpayer Certainty and Disaster Relief Act of 2020, which, in an effort to support the struggling food-service industry, temporarily increased business meal deductions to 100% for qualifying expenses incurred during January 1, 2021 through December 21, 2022. However, in order to qualify, the expenses still need to meet all of the IRS’s requirements.
First off, in order to qualify as a meal deduction, it’s important to know if the place you’re buying food from qualifies as a restaurant in the IRS’s eyes - according to the IRS, the term “restaurant” is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether or not the food or beverages are consumed on the business’s premises. This does mean that take-out can be deducted.
This definition also helps outline the places that sell food but don’t qualify as restaurants, resulting in the standard 50% deduction:
- Grocery stores and their deli departments
- Specialty food stores
- Beer, wine or liquor stores
- Drug stores
- Convenience stores
- Vending machines and/or kiosks
It’s important to note that since the Tax Cuts and Jobs Act of 2017, “Entertainment” is no longer deductible, but if the food and beverage is purchased separately from an entertainment activity and/or stated separately in an invoice, bill, or receipt, it may still be deducted.Still, it’s a good idea to check that your reports list meals in the category “Meals” rather than “Meals and Entertainment”.
Next, in order to claim the deduction, a business owner or employee of the business needs to be present when the beverages or food is purchased, the expenses can not be “lavish or extravagant”, it must be business-related, and you need to keep a record of the business-related contact the meal was with.
Finally, it is important to save the receipt and document the amount of the expense, time and place of the expense, the business relationship between the taxpayer and those being entertained, and the business purpose of the expense.
To make staying organized easier, we recommend writing a note on your meal receipt listing who you ate with and what the nature of your business was, and filing it away as soon as possible. Having a consistent and repeatable system for tracking your meal expenses & receipts will help make sure that you stay compliant, that nothing falls through the cracks, and that you can maximize your deduction/tax savings.
In short, in order to qualify as a meal deduction, you need to:
- Ensure that the business owner or an employee is present.
- The cost of the meal and/or the beverages must not be “lavish or extravagant”.
- The meal must be business-related, for “ordinary and necessary” business purposes, and with a business contact such as an employee, consultant, customer, or a vendor.
- Food and beverages must be purchased from a restaurant that matches the definition of “restaurant” per the IRS.
- Entertainment activities are not deductible; however, if invoiced, billed, or stated in a receipt separately, food and beverage items may be deducted as long as they are purchased separately from the entertainment activity.
KORE Accounting Solutions is a future-focused management accounting firm specializing in providing legal professionals and business owners with the data and insights they need to stay compliant and run more profitable firms.