There are several specific rules to determine if a meal is a legitimate business expense. These specific rules include meeting the business purpose requirement and the ordinary and necessary requirement. In this article, it's assumed that the meal has met these requirements and is indeed a business expense.
Meals are generally 50% deductible. This means when a business pays for a meal, only 50% of that amount is deducted on the tax return. It's extremely important to know the exceptions to this rule because some meals are 100% deductible!
Meals that are 50% deductible include:
- Meals with clients, customers and vendors.
- Meals with employees
- Meals with partners, shareholders and directors
- Meals during business travel
- Meals while attending a business seminar or convention
**Exception to the Rule (This is a great exception!)
Some meals are 100% deductible! These meals include:
- Meals for the business holiday party or other social event (like the company picnic).
Office snacks provided to employees at the office. This may include coffee, soda, water, candy, donuts, and similar snacks.
Meals provided on the employer's premises to more than half of the employees for the convenience of the employer. An example of this is when a business provides meals to employees in order to keep them working weekends or working later than usual. This is for the employer's convenience to keep the employees at the office.
Meals for which the business is reimbursed for the expense. For example, if a business takes a client to lunch and then bills the client for that lunch in a separate line item on the invoice, then the business can fully deduct that meal.
Ever wonder why some accountant or attorney invoices show the meals expense as a separate line item? Because it makes the meal expense fully deductible to them and makes it 50% deductible to the client! Be careful if you are on the receiving end of this invoice!
If the meal expense is not specifically itemized on the invoice (and just lumped into the service fee), then the meal is only 50% deductible to the business and 100% deductible to the client.
*Important Tip: When it comes to preparing your tax return, it's easy to forget which meals met the requirements to be 100% deductible. And if your tax preparer has never asked you this it most likely means all of your meals are being subject to the 50% limitation ! It's best to capture this information when you actually have the meal. You can do this by setting up two meal expense accounts in your books:
Meals - 50% deductible
Meals - 100% deductible
Simply code it the proper account when you enter it in your accounting program (such as QuickBooks). Then it's all ready for your tax preparer with no additional work!
Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com