If you own a business, you may be able to take the meals and entertainment deduction to lower your tax liability. Generally, you can deduct the cost of business-related meals and meals consumed while traveling overnight, whereas the business-related entertainment costs aren’t deductible. The purpose of the meal or event and who benefits from it are important factors in determining which expenses you can write off.
Type of Expense
Business Meal With Clients at a Restaurant in 2021 and 2022
Business Meal With Clients at a Restaurant After 2022
Business Meal With Clients With Food Purchased From a Grocery Store
Office Snacks & Meals Purchased From a Restaurant in 2021 and 2022
Office Snacks & Meals Purchased From a Restaurant After 2022
Office Snacks & Meals Purchased From a Convenience Store
Meals While Traveling Away From Home Overnight
Client Meeting With Snacks Purchased From a Grocery Store
Meals & Entertainment (Included in the Employee’s or Contractor’s Compensation)
Enhanced 100% Meals Deduction for 2022
To provide business owners with some tax relief during the ongoing public health and economic crisis, Congress passed the Taxpayer Certainty and Disaster Relief Act in 2020. The Act allows business owners to deduct 100% of the cost of business-related restaurant meals consumed between Jan. 1, 2021, and Dec. 31, 2022. Previously, you could only deduct 50% of the cost.
This entitles businesses to deduct the full cost of business-related food and beverages purchased from a restaurant. Grocery stores, convenience stores, and other businesses that mostly sell prepackaged goods don’t qualify as restaurants, and the deduction doesn’t apply to entertainment, which remains a disallowed deduction.
To qualify for the enhanced deduction, the expenses must fit the following criteria:
- Payment or billing for the food and beverages occur after Dec. 31, 2020, and before Jan. 1, 2023.
- Meals must be from restaurants, which includes businesses that prepare and sell food or beverages to retail customers for immediate consumption, either on- or off-premises.
- The business owner or an employee of the business must be present when food or beverages are served.
- Expenses cannot be extravagant. Generally, while the interpretation may be subjective, it must be a reasonable expense based on the circumstances.
Meal Types That Can Be Deducted
- Business meals
- Meals while traveling away from home overnight
- Meals served at the employer’s premises for the employer’s convenience
- Company parties
To determine whether a meal can be deducted, first ensure that your meal deduction is allowable by the IRS. Ask yourself if the expense is commonly accepted in your industry and helpful for your business. Examples of permissible meals include taking a prospective client to dinner to convince them to hire you and meeting a supplier for drinks to negotiate a better price.
You must also consider whether the meal was purchased in a restaurant or somewhere else, like a grocery store. For example, if you’re dining with a client at a restaurant, you can consider that meal 100% tax-deductible under the enhanced deduction rules for 2021 and 2022. However, if you’re entertaining that same client in your office with snacks you purchased at the grocery store, the meal is only 50% deductible.
Meal Types That Cannot Be Deducted
Any meal not described in the above section cannot be deducted, but here are a few specific examples of nondeductible meals that sometimes confuse taxpayers:
- Meals not separately stated from the cost of entertainment
- Customer meals where the taxpayer or employee isn’t present
- Employee meals while traveling for a day where no overnight stay is required
Standard Meal Allowance vs Actual Cost When Traveling
Reimbursed nonentertainment-related meal expenses are generally deductible if your business trip is overnight or long enough that you need to stop for substantial sleep or rest to properly perform your duties. There are two methods that you can use to calculate your travel meal expenses:
- Standard meal allowance: This is the federal meals and incidental expense (M&IE) per diem rate. The United States General Services Administration website lists these rates by location. Lower rates apply for the first and last days of travel. The standard 2021 rate for most locations is $96 per day, but this can be substantially higher for higher-cost areas. The standard meal allowance is substituted for the actual meal expense and multiplied by 50% to arrive at the deductible portion.
- Actual cost: If you use this method, you must keep records of your actual costs.
The 2017 Tax Cuts and Jobs Act made some drastic cuts to entertainment expenses, many of which are no longer deductible even if the event is attended by the taxpayer and a customer and business is discussed. Generally, the IRS doesn’t allow businesses to deduct costs for activities generally considered entertainment, amusement, or recreation, or for a facility that’s used in connection with such activity.
However, meals where the cost is stated separately can be deducted if the business is discussed. If you can separate the cost of a meal at an entertainment event and the event itself, and you have a receipt that states the meal expense separately, you can deduct the meal cost at 50%.
Entertainment That Can Be Deducted in 2022
Here are two examples of entertainment that can still be deducted:
- Entertainment expenses that are compensation to the person and are reported on Form W-2 for an employee or Form 1099-NEC for an independent contractor.
- Events, such as company picnics or holiday parties, which are held for the benefit of the employees.
Entertainment That Cannot Be Deducted in 2022
Here are a few examples of entertainment expenses that aren’t eligible for tax deductions:
- Tickets to the theater, concerts, and other similar activities
- Fees for outdoor activities, including fishing, hunting, and sailing outings
- Business entertainment expenditures at a social club, golf club, or similar venues
- Sporting events tickets, including skybox expenses and transportation to the event
- Contributions to educational organizations for the right to purchase tickets to athletic events that are no longer considered charitable contributions and not deductible
As a result of legislation that has been passed over the last few years, business owners can take advantage of an enhanced 100% meals deduction through the end of 2022. While entertainment is still for the most part nondeductible, businesses can deduct either 50% or 100% of meal expenses, depending on where the meals took place and under what circumstances. It’s important to review the nuances of the meals and entertainment deduction to understand fully the tax breaks that you’re eligible for as a business owner.