Among all the tax deductions, the ones for meals may be among the best. What can be better than being able to claim a steak and baked potato as a tax deduction? But there are very strict rules regarding meal deductions, including that they must be ordinary and necessary and that you can only deduct half of the cost.
Deducting Business Meals
If you run a business or are self-employed, you can deduct the cost of meals as long as they are directly related to your business. But you can only deduct 50 percent of the cost, and you can’t deduct meals that would be seen under audit as extravagant. So if you’re dining on filet and caviar, you’ll need to skip deducting those meals as business meal expenses.
Things get a little confusing, though, if your meal is part of a dinner show or other entertainment. Under the Tax Cuts and Jobs Act, the IRS updated its guidance on meal deductions to say they must be split out from entertainment expenses. In other words, if you take your clients to dinner and a show, the “show” part of the evening can’t be deducted, only the meal. You also can no longer take your clients to sporting events and claim the expense as a tax deduction.
Who Can Deduct Meals?
It’s important to clarify that meal expenses can only be deducted by self-employed individuals and businesses. If you have an employer, you should be submitting those meal receipts to your supervisor for reimbursement. Even if your employer doesn’t reimburse them, though, you can’t claim them on your taxes if you’re working for someone else.
There are some exceptions to this, though. Armed Forces reservists, qualified performing artists, fee-based state or local government officials and employees with impairment-related work expenses may still be able to claim unreimbursed employee expenses on their taxes. If you fall into one of those four categories, you’ll need to complete Form 2106 to take the deduction.
When Can You Deduct Meals?
Another area of confusion is when you can deduct the cost of meals. Typically, taxpayers take meal deductions for expenses related to travel. If you’re staying overnight, you can claim 50 percent of the cost of your meals as long as they aren’t extravagant, and you don’t include the cost of entertainment in your deduction
You can still claim half of the cost of meals even when you aren’t traveling, though, as long as the meals were related to meeting with a client or doing business. You cannot claim meals with co-workers or others, even if you discussed business. You also can’t claim the cost of meals you ate while working late.
Necessary and Ordinary Business Meals
In order for your meal to pass an IRS audit, it will need to fall into the category of being “necessary and ordinary.” An ordinary expense is one that is commonly accepted as part of doing business, while a necessary expense is one that is helpful and appropriate. If it would be clear to an auditor that the meal was connected to your trade, it’s likely eligible.
Meals that were consumed while away from home are fairly clean-cut, as long as you were away from home on business. Take a close look at any meals you try to deduct when you are at your “tax home,” though, which is the city you use when filing your taxes. Those are likely to be closely scrutinized. You can claim local meals consumed with a client in the act of generating or keeping their business, as well as local meals consumed at a business convention or business league meeting.
Read More: Can I Claim Grocery Food Items on Taxes?
Meals and Business Travel
Some of the most common meal deductions happen while traveling. It’s important that you be able to prove your trip was for business purposes, of course. The general rule is that you can claim meals while traveling if your trip was overnight or long enough that you needed to stop for substantial rest.
There are two ways you can deduct meals for business travel:
- Actual cost. This method has you tallying the cost of each meal, dividing it in half and submitting the amount as a deduction. You’ll need to keep the records for three years in case the IRS questions the deduction.
- Standard meal allowance. The U.S. General Services Administration sets per diem rates for each area of the U.S. You’ll need to check those rates and claim that as your daily cost. The first and last days of travel are considered partial days, so you’ll claim a reduced amount on those two days.
Separating Meal Costs
Since only your meals are deductible, separating the cost can be tricky. You’ll need what the IRS calls a “reasonable basis” for calculating the amount you’re claiming for the meal only. This is easy if you’re having a business dinner at a location where the cost for meals is listed separately on your receipt. But if the cost of meals is included with your ticket, you’ll have to determine the portion of the cost that was for food and claim half of that.
Entertainment-related meal expenses aren’t the only ones you have to separate out. If you’re staying at a hotel or attending an event where the cost of your food is included in the price, you’ll have to figure out what percentage of the amount was for food.
Deductions for Travel Companions
You likely aren’t always traveling alone. If a business associate or coworker is traveling with you, you can claim that person’s travel costs as a business expense. However, you’ll need to be able to demonstrate that, like you, your travel companion had a legitimate business-related reason for taking the trip.
Your travel companion doesn’t have to be tagging along on business. You can take your spouse, a friend or someone else along to spend time with you when you aren’t working. You just won’t be able to deduct your companion’s expenses on your taxes. To streamline things, get a separate receipt for meals and other expenses unless you’re claiming the per diem rate for your travel.
Buying Meals for Employees
Business owners have another perk. If you buy food for your staff, you can tax-deduct 100 percent of the cost. The meals must be provided on the employer’s premises and for the convenience of the employer. This can include cafeterias or delis furnished by the employer, as well as food you buy for meetings.
The convenience portion of the requirements simply means that there needs to be a business reason for furnishing the meals, not simply that you’re feeding your employees as additional compensation. In most cases, this is simply that you’re working hard on a project and want everyone to stay on-site rather than go offsite for meals.
The meal deduction part of your taxes can be complicated, but if you carefully check the tax laws, you can enjoy the tax break. If you’re planning to tax-deduct a meal, make sure you retain any receipts and make notes to yourself as to the specific business purpose of each meal in case you’re audited.
- IRS.gov: Publication 463
- IRS.gov: IRS Issues Final Regulations on the Deduction for Meals and Entertainment
- IRS.gov: Publication 529 (12/2019), Miscellaneous Deductions
- IRS.gov: Income & Expenses 2
- IRS.gov: How Long Should I Keep Records?
- GSA.gov: Per Diem Rates
- Lawyers.com: Tax Deductions for Employee Meals
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.