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.
Remember: Entertainment Deductions Are Separate From Meals
Another great deduction while doing business and having fun and entertaining is the “Entertainment Expense.” Now, although it is limited by 50%, this expense is also underutilized and small business owners should try to combine meetings with entertainment when collaborating with vendors, customers, partners or employees. I always suggest taxpayers keep a good calendar and notes of who they meet with while entertaining and what was discussed.
I also encourage my clients to write down all of the expenses, even if they seem excessive, and the accountant can always whittle them down if necessary when preparing the tax return. Remember, if you don’t write them down, they won’t even be a discussion point at tax time.
Tax Allowance for Dinner When Working Overtime
When your employees work overtime and you give the employee 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.
Lunch at the Office With Employees
Interestingly enough, if you take your employees to a restaurant for a working lunch meeting, the employee meals become an entertainment expense, which means the deduction is subject to a 50% cut.
If you want a 100% deduction, you have to hold the lunch meeting on the business premises and for the employer’s—remember, that’s you—convenience.
The phrase “employer’s convenience” can mean a variety of things, such as situations where:
- Employees must be on the premises for important or emergency calls, and it’s reasonable to expect them to occur.
- Employees are restricted to a short meal period, and you cannot reasonably expect the employees to eat elsewhere during such a short period.
- Employees must be restricted to the premises because they could not otherwise secure proper meals within a reasonable meal period.
Keep in mind, however, “employer’s convenience” cannot mean:
- The meal was provided as a means of providing additional compensation to the employees.
- The meal was furnished to make employees available for emergency calls.
- The meal was furnished to promote goodwill among existing employees or attract new employees.
Another interesting fact is that if the employer meets the “employer’s convenience” test for more than 50% of your employees, then meals furnished to all employees qualify as deductible for the employer. Essentially, you don’t have to provide lunch for all of the employees, but if you meet this 50% test, you can choose to feed them all if you want.
A Word of Caution
As small business owners, we want to be cautious by not overdoing it and claim a disproportionate amount of meals and entertainment 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.
The post How to Maximize Your Meals and Entertainment Tax Deductions appeared first on QuickBooks.
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