Meals and Entertainment Deduction
Over the last few years, the rules and regulations around the meals and entertainment deductions have changed multiple times. Due to COVID, lawmakers want to help restaurants, so they increased the meals deduction for 2021 & 2022. However, now that COVID is over, they’ve gone back to pre-COVID amounts.
We are going to go over the various changes so you don’t miss any deductions for your business.
Meals and Entertainment before the new rules
Pre-2017, the Tax Cuts and Jobs Act (TCJA) (sometimes called Trump Tax Reform) most meal and entertainment expenses were allowed a 50% deduction. These included:
- Business meals with clients,
- Travel meals,
- Employee meals at off-site meetings,
- Employee meals for the convenience of the employer,
- Entertainment costs for prospecting clients,
- Office holiday parties for employees and clients (100%),
Starting in 2018 the rules changed, only meals were allowed the 50% deduction. That’s right, entertainment, even when prospecting clients were no longer deductible.
Meal and Entertainment Deduction 2023
In order to help the restaurant industry during COVID, Congress has passed a temporary law that allows a 100% deduction for meals. The catch is, in order for the meal to be deductible, it has to be served at a restaurant that offers food and beverages. Now that COVID is over, it’s no longer a 100% deduction.
I know what your thinking, what if we order food from a rideshare like Grubhub, Uber Eats, or Postmates? What if I pick up food as take-out for my staff? No need to worry, as long as the restaurant itself provides food and beverages, you’re safe to take the deduction.
What does the IRS define as a restaurant for the deduction?
The IRS defines a restaurant as, “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” That means dine-in, delivery, or take-out all count.
However, the IRS goes on to list things that are not restaurants, such as:
- Pre-packaged foods or beverages not for immediate consumption,
- Grocery stores,
- Specialty food stores,
- Beer, wine, or liquor stores,
- Convenience stores,
- Vending machines or kiosks
It other words, if someone isn’t preparing the food for you to eat immediately, it’s not deducible.
Meals and Entertainment Deduction 2023 Chart
We went ahead and created a chart for you, to help with the changes over the last few years. Here is what percentages are deductible by year.
|Activity||Pre-2017 (TJCA)||2023 & Beyond||2021 & 2022|
|Business meals with clients||50% deductible||50% deductible||100% deductible**|
|Travel meals||50% deductible||50% deductible||100% deductible|
|Employee meals for the convenience of the employer||50% deductible||50% deductible||100% deductible|
|Employee meals at off-site meetings||100% deductible||50% deductible||100% deductible**|
|Entertainment costs for prospecting clients||50% deductible||nondeductible||nondeductible|
|Office holiday parties, cost for employees||100% deductible||100% deductible||100% deductible|
|Office holiday parties, cost for clients||50% deductible||nondeductible||nondeductible|
According to the IRS, meals and entertainment is one of the most abused deductions used by small businesses (the other one being business owners’ automobile deduction). Working at the IRS, and running a CPA firm, I know what the IRS looks at when they are looking at your meals deductions. That’s why the IRS would like you to keep track of important items regarding meals. Here are some of the more important rules to keep in mind:
- Make sure to keep copies of all receipts for meals that are over $75.
- If you’re not traveling, you can’t deduct meals for just yourself. I’ve seen the IRS strike down meals transactions if they assume the meals are all for yourself and you have no back up.
- Keep a log of the following:
- Write down the name of the person you entertained,
- The place you ate,
- The date,
- The business purpose
- Example: Lunch with Jeff Halmos, on 8/15/2021, at Nobu Sushi for $112.54, about new logo design.
Don’t forget, Congress enjoys eating out too, so they want you to have that deduction. So keep a log and track your meals accordingly.
Here are a few examples to help you with the new rules for 2023 & beyond:
- You take a client out to lunch for a business meeting – 50% deductible.
- You take a client out to the Raider’s football game – non-deductible.
- You take a prospect out to the Golden Knights hockey game and there is food involved – as long as the receipt breaks out the meals from the cost of the tickets, the meals are 50% deductible.
- Meal at a high-end restaurant while you’re on business travel – 50% deductible.
- Meals cooked by you while on business travel – 50% deductible.
- Holiday party for your employees – 100% deductible.
- Holiday party for your employees and clients – Cost per employee 100% deductible, cost per client non-deductible.
Suggestions for Bookkeeping
Due to the changes between the deductibility for meals and entertainment we recommend that you create different categories in your bookkeeping so you can separate what is 100% deductible from what isn’t. Meal and Entertainment Deduction categories that we suggest would be:
- Travel Meals
- Travel Expenses
- Employee Social Meals (holiday parties, summer picnic, team building events, etc.)
****This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction(s).