The Skinny on Deducting Meals

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One of the most common questions I get asked by clients is how much they can deduct for meals.  To answer the question I am going to break this down.

Are meals ever deductible?

Yes! The caveat with deducting your meals is whether they are directly related to or associated with your business activity.  Additionally, you must be able to prove that the purpose of the meal was business and that there is more than a general idea that you will be engaged in business with them in the future.  Some examples of non deductible meals:

  1. Deciding not to bring your lunch from home and grabbing a sandwich does not constitute a business activity and is not deductible.  If you were traveling to and from clients and needed to stop for lunch because you could not reasonably go home or bring your lunch, you may have grounds for a deduction.
  2. Generally meals with business associates and coworkers are not deductible unless you can establish a clear business purpose.
  3. Having a meal with someone with the hope that they may be a client or customer someday does not make the meal deductible.

Additionally, you will need to keep records of your expense and business purpose should your deduction be challenged.  Using a spreadsheet or writing the information right on the receipt doesn’t take very long and could save you hours in the future.

Most meals are only 50% deductible

Even when your meals are legitimate and deductible most are only deductible up to 50%.  This means that it is important for companies to discuss and decide the appropriateness of using this deduction.  Spending $5,000 on meals throughout the year could result in an additional $2,500 of taxable income and depending on your tax rate, the numbers can add up.

Exceptions to the 50% limit

There are circumstances where meals are fully deductible:

  1. As a fringe benefit.  You can deduct the cost of meals served on the premises for the convenience of the employer.  An applicable scenario would be a lunch meeting where the employer provides lunch so that they can continue working.
  2. As compensation. You can deduct the full cost of meals if they are added as taxable income to the employee’s wages.
  3. As a promotional activity.  Meals provided to the general public as part of a promotional event can be fully deductible.  A promotional event would include the snacks at a retailer’s open house event.
  4. At special occasions. If you provide meals for your employees at a social or recreational event such as a holiday party or summer picnic, the cost of the meals is fully deductible.

The deduction for meals is a nice way for business owners to conduct their activities in a more enjoyable and stress free atmosphere as well as providing a nice benefit to employees.  Because it is an attractive deduction it has the propensity to be misused and abused.  The IRS can easily disallow your deduction if you cannot provide appropriate support for your deduction upon audit.  My advice is to add this deduction to your business toolkit: use it when it is appropriate for good business practice but remember its limitations.

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