When is That Meal Tax Deductible? (updated 02.01.17)

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WHICH MEALS ARE DEDUCTIBLE ON YOUR BUSINESS TAXES?

There’s a lot of confusion among taxpayers about what meal and entertainment expenses they can legitimately deduct as business expenses on their tax returns. Professional tax preparers aren’t in complete agreement on the subject either. Not too surprising, considering the length and complexity of the Internal Revenue Code.

As I said in an earlier article, in order to deduct any expense as a business deduction, it has to be ordinary, necessary, and reasonable based on the facts and circumstances. Because the deductibility of business expenses is one of the 10 most litigated tax issues, you should discuss your individual situation with your CPA or tax pro.

Contrary to popular opinion, there is NOT a separate category for in town meal expenses. Local meals might be deductible as entertainment expenses if you entertain a

  • client
  • customer or
  • employee

and the expenses are

  • directly related or
  • associated

with your business. You or one of your employees must be present.

Directly related means that the entertainment took place in a business setting or the main purpose of the entertainment was the active conduct of business.

AND

You did engage in business during the entertainment and you had more than a general expectation of getting income or some specific business benefit.

You don’t have to spend more time conducting business than you do on the entertainment, but if the business discussion is only incidental to the entertainment, the expenses will not be considered directly related.

What that means is that you can’t treat a friend, colleague, or spouse to dinner and expect that all they have to do is ask you “how’s business? ” in order to take the cost of the meal as a deductible business entertainment expense.

What about paying for lunch for your employees on a normal work day?

For the meal to be deductible, you’d have to prove that the main purpose of the meal was conducting business, you actually did conduct business, and you had more than a general expectation of some specific future business benefit. Then the meal would qualify as directly related. If that weren’t the case, you’d have to prove that the meal occurred directly before or after a substantial business discussion.

If you take one of your workers to a local restaurant because it’s convenient that day and you feel generous, but all you talk about while you eat your burgers is the awful officiating at last night’s game…sorry, that won’t be deductible.

Expenses that don’t meet the directly related test could meet the associated with business test if the entertainment had a clear business purpose (for example to get new business or to encourage the continuation of an existing business relationship) and was directly before or after a substantial business discussion.

You can’t deduct the cost of meals for your spouse or the spouse of client unless you can show they had a clear business purpose.

Meal expenses include the costs of food, beverage, tax, and tip. The amount you can deduct is 50%.

To prove your expenses, keep the proof in an account book, diary, log, trip sheet, expense statement or similar written record. Proof should include receipts, bills, and cancelled checks.

You must be able to show the

  • amount
  • date
  • place
  • purpose of the expense
  • nature of the discussion and
  • relationship of the people attending

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This is quite a complicated area. Since the IRS considers the facts and circumstances of each individual situation, it’s important for you to get help from a professional who knows your particular story.