Meal and entertainment expenses have been an area that has been ever changing in rules for deductibility for many years. Starting in 2023, we are back to meals being deducted at only 50%. We want to review some of the rules regarding food, beverage, and entertainment, as well as the recordkeeping that is necessary for the deduction.
As mentioned, meals are now deducted at 50% but as with anything, there are some exceptions to that rule which we will review later. Entertainment is not deductible. What does that mean? If you take a client to an event, i.e., a baseball game, the ticket cost is not deductible. Meals at the event are deductible at 50% as long as the meals are separately purchased. Another very common expense is membership dues: i.e., country clubs, golf and athletic clubs, airline and hotel clubs – all of these items may be a business expense but are not tax deductible.
Food, Beverage, and Entertainment: What’s Deductible as a Business Expense?
As a business owner, you are probably saying, “so what is deductible as a business expense?” We will look at what you can deduct as an ordinary business expense.
Business meals are generally deductible at 50% if the taxpayer (employee) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
A full deduction for business meals does apply in the following situations:
- Meal expenses of an employee reimbursed by the employer under an accountable plan. In this case, the employer is subject to the 50% limit.
- Meal expenses reimbursed to a self-employed person who provides adequate records of the expenses to the customer or client.
- Meals provided to the general public for promotional purposes.
- Company holiday parties, annual picnics or summer outings that do not discriminate in favor of highly compensated employees may be deducted at 100%.
- Snacks and beverages provided to employees in a break room are only 50% deductible. However, if snacks and beverages are provided in a waiting room for the general public and some of the food and beverages are consumed also by employees this expense may be deducted at 100% as long as more than 50% of the refreshments are consumed by customers.
As with all business expenses, receipts are a must and with expenses in this category special rules apply for substantiation of expenses. The taxpayer must maintain records that include the amount of the expense, the time and place of the expense, the business purpose and the business relationship between the taxpayer and the persons that provided a meal.
The rules can be complex as to what is deductible at 50% versus 100% and each business is unique so that is why it is very important to consult a CPA about your particular business. Here at Cyron & Company, we are here to help.
For over 20 years, Cyron & Company has offered small businesses and individuals in and around Kennett Square, Pa., a comprehensive suite of customizable accounting and tax services, including outsourced accounting and CFO Services; tax planning and preparation; financial statement reviews and compilations; business startups and planning; and QuickBooks® online consulting and training.
