The tax rules surrounding business-related meal and entertainment expenses have evolved over recent years, leaving many business owners unsure about what can be deducted. Here’s a simplified guide to help you navigate these rules for 2024.
What’s Allowed
Entertainment Costs
The Tax Cuts and Jobs Act eliminated deductions for most entertainment expenses. For example, if you take a client out for a round of golf or a football game, those costs are not deductible.
Food and Beverage Costs
You can still deduct 50% of the cost of food and beverages when they’re related to your business or consumed during business-related entertainment.
Food and Beverage Costs: What’s Included?
Food and beverage expenses cover anything from meals to snacks, including sales tax, delivery fees, and tips.
To qualify for the 50% deduction when combined with entertainment, the food and drinks must either:
- Be purchased separately from the entertainment, or
- Be itemized on the bill, invoice, or receipt with a clear price for the food and beverages.
If the items aren’t purchased or listed separately, you can deduct 50% of the reasonable value.
Additional Rules for Deducting Meals
The IRS requires that the following conditions are met for a business meal to be 50% deductible:
- The meal must not be considered lavish or extravagant given the circumstances.
- You (or an employee) must be present during the meal.
- The meal must involve a business associate, such as a client, customer, supplier, employee, or partner with whom you expect to conduct business.
Pro Tip: You can also deduct 50% of the cost of your own meal if you’re working late or traveling for business.
Meals While Traveling for Business
Meals while traveling for business are also 50% deductible, as long as you follow the substantiation rules (keep those receipts!).
However, meal costs for spouses, dependents, or others traveling with you are not deductible unless:
- Their expenses would normally qualify as deductible (e.g., they are employees of your company and traveling for a legitimate business reason).
100% Deductions: When Do They Apply?
Some situations allow for full deductions. For example:
- Employee Events: Meals and entertainment provided for all employees, such as holiday parties.
- Public Events: Food and entertainment available to the general public, like free snacks and music at a promotional event.
- Customer Purchases: Food, beverages, and entertainment sold to customers at full price.
- Taxable Income: Meals and entertainment reported as taxable compensation to employees or on Form 1099 for non-employees.
- Restaurant Businesses: If you run a restaurant or catering business, 100% of the cost of food and beverages provided to paying customers and on-site employees is deductible.
Key Takeaway
Deducting business-related meals can save your business money, but the rules can be tricky. Reach out to us for guidance tailored to your unique situation or for more details on how to make the most of these deductions. The closest Padgett office to you can be found here!