With the many changes to business meal deductions that have taken place over the last few years, it’s a good time for a refresher on whether meals are 100% deductible.
The short answer is no. As of 2023, business meals are no longer 100% deductible.
The relevant part of the IRS regulation is Topic No. 511, Business Travel Expenses: “The deduction for business meals is generally limited to 50% of the unreimbursed cost.”¹
So, the current business meal deduction is 50%. That means you get a write-off for 50% of the cost of the food you eat this year while conducting business.
What you’ll learn in this article will save you money
Business lunches help business leaders build relationships and are an overall boost to productivity. They’re also an opportunity for tax breaks.
One common question I encounter as an accountant is how business meal deductions work. Today, I’m here to shed some light on this matter.
In this article, I’ll explain everything you need to know about business meal deductions. Besides the exact rate, I’ll get into
- why the deduction exists,
- how to ensure you qualify, and
- how to turn lunches and dinners into tax savings.
The Basics of Business Meal Deductions
The IRS recognizes the benefits of business meals that I outlined earlier. That’s why they allow businesses to deduct a portion of their meal expenses to reduce their taxable income.
Business meals were briefly 100% deductible
Fifty percent might be a different figure than you’ve heard previously from other small business owners or clients. Confusion is understandable.
In 2021 and 2022, the Consolidated Appropriations Act (CAA) permitted businesses to deduct 100% of certain business meal expenses. This temporary measure was aimed to support the restaurant industry during the pandemic.²
As of 2023, deductions have reverted to pre-2021 levels. The majority of business meals are now 50% deductible.
Keep these two IRS rules in mind every time you expense a meal
The IRS says that you can’t deduct meal expenses unless:
- You (or an employee) are present at the furnishing of the food or beverages and
- The expense is not lavish or extravagant under the circumstances.
The first rule is easy enough. Don’t try to deduct any meals that don’t actually involve your business.
As for the second — you might wonder what counts as “lavish or extravagant”? The IRS actually hasn’t given any specific examples, and that guideline has never been challenged in court. My advice: don’t push it. Hold off on getting too many lobster thermidors, or that fourth martini.
By keeping your business meals reasonable and holding onto your receipts, you’ll be able to deduct 50% of the cost without hassle.
Restrictions have increased, but business meals are still profitable
Let’s take a step back in time.
In the 1960s through the 80s, meals were 100% deductible, hence the colloquial “three-martini lunch,” where extravagant meals and other entertainment could be charged and completely deducted.
The Tax Reform Act of 1986 put a stop to that, lowering the deduction rate to 80%, and requiring that actual business be discussed at a meal. In ‘94, the government lowered the rate again, this time to 50%.
The deduction used to include other entertainment
The business meal deduction became stricter still in 2018, with the passage of the Tax Cuts and Jobs Act (TCJA).
The TCJA removed deductions for entertainment expenses other than meals. So, you could no longer deduct the cost of a basketball game or evening at an event, even if you and your client discussed an important business matter.
And that’s pretty much where things stand today. Meals have to be solely about business (where business is discussed). And while the deduction is smaller than it was previously, it’s still a great way for businesses to deepen client relations and save money on taxes while doing so.
Here’s how to make the most out of business meal deductions
While business meals are not 100% deductible, they should still be part of any small or growth-stage business’s strategy.
Remember, you need to be using every available tax credit and deduction.
Go after business meal deductions for travel, conferences, and team building
Other purchases, like food for your office, meals while traveling for work, and meals at a conference can also be deducted at the 50% rate.
Hold onto your receipts
I’ve said that in other blog posts, but I’ll repeat it here because it’s important: Hold onto your receipts.
Yes, there are circumstances where you can claim a deduction without a receipt, particularly if the cost is under $75. However, it’s always better to hold onto your receipts so you have as much proof as possible in the unfortunate event of an audit.
Account for meal deductions with the correct IRS form
You will report meal deductions wherever you calculate your income and expenses.
- Sole proprietors list that information on Schedule C (Form 1040)
- Partnerships on Form 1065
- Corporations, including S Corporations, on Form 1120
Keep a look out for expenses that are 100% deductible
I didn’t say this earlier to keep things straightforward, so here’s a little reward for those of you who read the entire article: A few kinds of meals are 100% deductible. They include:
- Food for company holiday parties
- Food and beverages given to the public
- Dinner for employees working late at the office
These are valuable tax deductions, and your business should utilize them to reward your employees and build brand awareness.
Here’s the takeaway to remember on meal deductions
Keep these kinds of business meals and travel expenses reasonable but aggressively take advantage of the deductions when you have the opportunity.
Need help? Let’s talk about your business
Even business meals come with a degree of complexity, so staying informed about the latest tax laws and working with a professional can help your business turn rules and regulations into opportunities for savings and growth.
If you’re in the Fort Worth area and need help with credits or deductions, give me a call. For more than a decade I’ve helped small and medium-sized businesses reduce their tax liability.
Schedule a discovery call with us today.
Jeremy A. Johnson, CPA
- Topic no. 511, business travel expenses. Irs.gov. June 15, 2023. Available from: https://www.irs.gov/taxtopics/tc511
- Here’s what businesses need to know about the enhanced business meal deduction. Irs.gov. June 14, 2022. Available from: https://www.irs.gov/newsroom/heres-what-businesses-need-to-know-about-the-enhanced-business-meal-deduction
- Income & expenses 2 [Internet]. Irs.gov. [cited 2023 Oct 15]. Available from: https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-2