Michele Knight for SummitDaily.com writes: In perhaps one of the grayer areas of tax deductions, I often see
bookkeepers and small business owners separate their meal expenses into a
number of different categories. Usually, the list looks something like
this: in-town, out of town, employee meals, business meals, travel meals
and owner meals. I've seen this enough times that I decided it was
worth doing a bit of research to clarify exactly what is allowed.
Why are meals such a cloudy area? The first reason is that they are only 50 percent deductible in most cases. So, there is an incentive to move certain meals into a category that gets a full tax deduction, rather than a reduced one. A 50 percent deduction means that if $100 is spent on a meal, the business only gets to deduct $50 of that expense. The IRS rationale, which does make sense to me, is that you would've eaten no matter what, so you cannot attribute the entire cost as a business expense, only a portion.
So, which meals are deductible? First, the meal must be determined to be directly related to the active conduct of a trade or business. You can leave this to your own interpretation, but generally business meals include employees, shareholders, vendors, strategic partners, customers, or potential customers of a business. This also includes any meal during business travel, as long as the trip is entirely related to business and is not personal in nature.
Once you've determined if a meal is deductible, next you need to consider whether it's 50 percent or 100 percent deductible. Since most meals are only 50 percent deductible, it's easier to focus on the few situations when you can fully deduct the meal. The largest of these expenses are company picnics or holiday parties, and in order to be eligible, the entire company needs to be invited and the event must be held on an infrequent basis (therefore, providing lunches once a week would not qualify).
Smaller examples of fully deductible meal expense are office snacks and bottled water, food provided to the public for free as part of a promotional expense, and meals provided as part of a charitable sporting event to raise money for the benefit of a 501(c)(3) organization.
When it comes to an employer providing meals to an employee, it gets a bit trickier. If the meal is provided on the employer's premise and to more than half of the employees, it is still only 50 percent deductible, unless it is provided in order to keep the employees working late, on the weekend, or they are required to be on call at that premises. Again, office lunches wouldn't qualify, but bringing in a late night meal because the employees needed to work extra hours to finish a project would fit the description.
Best practices say that you should keep all receipts for meals and document who attended the meal and what was discussed right on the receipt (although I've never had an auditor request that level of detail). It makes sense to track meals into two separate categories, 100 percent and 50 percent, but based on the criteria above, most meals will end up falling into the partially deductible category.
Why are meals such a cloudy area? The first reason is that they are only 50 percent deductible in most cases. So, there is an incentive to move certain meals into a category that gets a full tax deduction, rather than a reduced one. A 50 percent deduction means that if $100 is spent on a meal, the business only gets to deduct $50 of that expense. The IRS rationale, which does make sense to me, is that you would've eaten no matter what, so you cannot attribute the entire cost as a business expense, only a portion.
So, which meals are deductible? First, the meal must be determined to be directly related to the active conduct of a trade or business. You can leave this to your own interpretation, but generally business meals include employees, shareholders, vendors, strategic partners, customers, or potential customers of a business. This also includes any meal during business travel, as long as the trip is entirely related to business and is not personal in nature.
Once you've determined if a meal is deductible, next you need to consider whether it's 50 percent or 100 percent deductible. Since most meals are only 50 percent deductible, it's easier to focus on the few situations when you can fully deduct the meal. The largest of these expenses are company picnics or holiday parties, and in order to be eligible, the entire company needs to be invited and the event must be held on an infrequent basis (therefore, providing lunches once a week would not qualify).
Smaller examples of fully deductible meal expense are office snacks and bottled water, food provided to the public for free as part of a promotional expense, and meals provided as part of a charitable sporting event to raise money for the benefit of a 501(c)(3) organization.
When it comes to an employer providing meals to an employee, it gets a bit trickier. If the meal is provided on the employer's premise and to more than half of the employees, it is still only 50 percent deductible, unless it is provided in order to keep the employees working late, on the weekend, or they are required to be on call at that premises. Again, office lunches wouldn't qualify, but bringing in a late night meal because the employees needed to work extra hours to finish a project would fit the description.
Best practices say that you should keep all receipts for meals and document who attended the meal and what was discussed right on the receipt (although I've never had an auditor request that level of detail). It makes sense to track meals into two separate categories, 100 percent and 50 percent, but based on the criteria above, most meals will end up falling into the partially deductible category.
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