Under the Tax Cuts and Jobs Act, which went into effect on January 1, 2018, business owners no longer can deduct the costs of business entertainment, amusement, or recreation. This broad change initially was interpreted to eliminate paying for meals or drinks at restaurants. However, the IRS has confirmed that the Tax Cuts and Jobs Act did not completely eliminate the deduction for business meals. You can deduct half of the costs related to business meals as long as they are ordinary and necessary, assuming that they were actually incurred in the course of doing business. In other words, you cannot use the deduction for a personal meal if you are a business owner, and you cannot use the deduction for a meal that was unduly extravagant. However, the deduction is not limited to certain types of restaurants, and it is not capped at any dollar limit. Business owners thus rarely run into trouble based on a meal being too extravagant, as long as they can document the cost.
The business owner or one of their employees must attend the meal. The business must provide the meal to customers, clients, potential customers, or other reasonable contacts of the business. The meal does not need to be attached to a specific result, such as signing a contract or securing a client. It does not need to be absolutely essential under the “ordinary and necessary” requirement. “Necessary” means only that the meal is appropriate and helpful for the business.
Meals During Entertainment Activities
If you attend an entertainment activity with a client or customer, you may purchase a meal during that activity. For example, you might buy hot dogs and ice cream while you are at a stadium. If you can show that you purchased the food or drink separately from the entertainment, or if a receipt lists the purchases separately, you can apply a deduction to those meals. It is important to be aware that the expense must be listed separately. Thus, if you get a package deal that includes tickets to an entertainment event as well as food, you may want to contact the venue or the provider of the package deal. They likely will be willing to list the food and drink items separately so that the deduction can apply to them.
Records of Business Meals
Business owners typically have exploited this type of deduction, which has led the IRS to review meal costs carefully. If you are planning to apply a deduction, you will want to record the cost of the meal, the location and date, and the business contacts who shared the meal with you. You will need to provide enough information to establish a legitimate business relationship. The deduction can apply to any tax or tip related to the meal as well.
If your meal costs $75 or more, you will need to keep the specific receipt from the meal, as well as any canceled checks and other documentation for the meal. You will not need this formal documentation if your meal cost less than that amount, but you still will need to record the basic information described above.
Meals During Business Travel
If you are traveling on an overnight trip for your business, you can partly deduct expenses for meals on your trip. You must travel outside the city or the area where you live. However, since you would need to eat regardless of where you are located, and you cannot deduct meals at home, you will be able to deduct only half of the costs of your meals on a business trip. You can use either the actual expense method or the standard meal allowance method to calculate the deduction. Whichever method you choose must apply to all of the trips that you take in a certain year.
Business owners will need to keep careful records of their meal expenses, including tips and taxes, to claim this deduction by using the actual expense method. Any meals on a trip that combines business with pleasure must be related to the business part of the trip to be deductible.
The standard meal allowance provides a simpler way to deduct meal expenses during a business trip. Essentially, a business owner can deduct a certain amount for each day of their trip, which will depend on their destination and when they travel there. As you might expect, the allowance is limited because it is based on what a federal government worker would receive to cover meals and incidental expenses on a business trip. Generally, you will receive a greater deduction by using the actual expense method, although some business owners may prefer the standard meal allowance if they are unwilling to log their expenditures meticulously.