When reviewing a client’s tax deductions on his or her return, I consistently see that the meals expense is highly underutilized, and yet it should really constitute a healthy line item on any small business owner’s tax return.
A lot of business is completed over food, and many entrepreneurs will admit that it’s important to track all of these expenses. It can be challenging, however, to understand which meals are a valid deduction, and what percentage of your costs are actually deductible. With your bottom line in mind, here are the types of deductible meals, and best practices for making those deductions.
The Three Types of Tax-Deductible Meals
Here are the three general types of meal expenses that a business owner should track in order to qualify for a tax deduction.
1. Meals Discussing Business With Someone Else
Dining expenses are always a write-off when discussing business with a partner, client, vendor or even a potential client. Make sure to record all expenses including tips, food and the bar tab. Remember, however, that all dining and entertainment deductions are still limited to 50% of the full amount. Your accountant will make this adjustment on the tax return when it’s prepared.
2. Meals by Yourself While Traveling for Business
Another overlooked write-off is dining by yourself when you are traveling. This “traveling/dining” deduction has been defined as times when the taxpayer is doing business outside of their normal commute or normal business location. Again, this is limited to 50%.
3. Events or Food Provided in the Workplace
The only time you can deduct 100% of your dining is when you are providing food in the workplace or for an event when a business presentation is being made. For example, when you take employees out to lunch, the deduction is limited to 50%, but if you bring in food for a training meeting (to obviously increase productivity and efficiency), then you can write off the entire amount.
Make sure to track this as a separate line item in your QuickBooks. Keep in mind that this can’t be considered a company party or a reward or benefit to your employees or customers. Thus, make sure you keep good records as to who attended, the business purpose for the event and what the presentation consisted of.
Finally, you might be wondering about standard break room supplies, like doughnuts and coffee. Those can be seen as a business expense, and are 100% deductible in the workplace, as they keep your staff billable and efficient.
Now that you know what’s deductible and how much you can deduct, let’s look at best practices for making those deductions.
Keep Good Records of Meals and Expenses
Do your best to take pictures of your receipts and/or scan them into a folder if it makes things easier. Also, having a bank or credit card record of the meal expense and a well-documented calendar of all your meetings will help justify your expenses under audit. The best bet, however, is simply to keep all of your receipts.
Tax Allowance for Dinner When Working Overtime
When your employees work overtime and you give the employee $30 for dinner, you get a 100% deduction, and it’s tax-free to the employee.
To get the deduction, however, the overtime dinner allowance must meet four criteria:
- You provide the benefit only occasionally (defined below).
- You pay no more than a reasonable (defined below) amount.
- The meal enables the employee to work overtime.
- It has to be discretionary and not tied to hours worked or a rate per hour.
Under IRS rules, “occasional” means “not routine and not regular.” In order for the deduction to be valid, “occasional” also cannot be a contractual right of the employee, and it shouldn’t be treated as something your employee should expect whenever they work overtime.
The term “reasonable” means you need to be able to justify that the money you provided to the employee is what he or she needed to get dinner without driving across town. Again, this deduction should be an isolated occurrence, not a routine offer.
Keep in mind if you don’t meet the four criteria above, then the entire deduction is disallowed, and the money given to the employee must be included in their paycheck as compensation.
A Word of Caution
As small business owners, we want to be cautious by not overdoing it and claim a disproportionate amount of meals as an expense in comparison to overall income based on the type of business. If you can keep your claims in check, this can be a worthwhile tax deduction for your business. Remember to discuss it each year with your accountant to maximize your deductions.
The bottom line is that food, whether it’s consumed at your office, at a restaurant or for a business event, can add up to be a significant expense on your books. While that 50% deduction can obviously limit your deduction, it’s better than not making a legitimate deduction claim when you could have.
If you choose to keep good track of your food expenses and keep several categories in your accounting software, like QuickBooks, then preparing your deduction won’t be a big deal, and you’ll be ready for tax-prep time.