Are Business Meals Still 100% Deductible?

Recent tax code changes have created uncertainty about deducting business meals. A temporary rule allowed for a 100% deduction for a brief period, but the regulations have since reverted to their previous state. This article clarifies the current Internal Revenue Service (IRS) rules for deducting business meal expenses.

The General Rule for Business Meals

A temporary provision in the Consolidated Appropriations Act, 2021, allowed businesses to deduct 100% of the cost of food and beverages provided by restaurants during the 2021 and 2022 tax years. This 100% deduction was a short-term exception and has now expired.

As of January 1, 2023, the standard for deducting business meals has reverted to the 50% limit established by the Tax Cuts and Jobs Act. This 50% deduction applies to most business meal scenarios, such as taking a client to lunch, meals consumed while traveling for business, or providing food for employees during a meeting.

Requirements for a Deductible Business Meal

For a meal expense to be deductible, it must be “ordinary and necessary” for your business. An ordinary expense is common in your field, while a necessary expense is helpful and appropriate for your business.

The expense cannot be “lavish or extravagant” under the circumstances. The IRS uses a test of reasonableness based on the facts of the situation. For example, ordering an excessively expensive item for a routine client lunch might be deemed extravagant.

The taxpayer or an employee must be present when the food or beverages are served. The meal must be provided to a business associate, such as a current or prospective client, customer, supplier, or consultant. This ensures the meal is directly connected to a business event.

Exceptions to the 50% Limitation

While the 50% limit is the general rule, some situations allow for a 100% deduction. Expenses for recreational or social activities primarily for the benefit of all employees, such as company holiday parties or annual picnics, are fully deductible.

Meals provided to employees on the business’s premises for the convenience of the employer are 50% deductible. However, this deduction is scheduled to be eliminated after 2025.

A 100% deduction is also allowed when the value of a meal is treated as taxable compensation to an employee and included on their Form W-2. Food and beverages made available to the general public for promotion, like free samples, can be fully deducted. Similarly, a restaurant can deduct 100% of the cost of meals consumed by its employees at the worksite.

Recordkeeping for Meal Expenses

Properly substantiating meal expenses is a requirement for claiming a deduction. The IRS has specific recordkeeping rules that businesses must follow to prove their expenses in an audit.

To substantiate a meal expense, you must record several key pieces of information:

• The total cost of the meal, including tax and tip
• The date the expense was incurred
• The name and location of the establishment
• The business reason for the meal
• The names of the individuals who attended and their business relationship

For any single expense of $75 or more, you are required to keep documentary evidence, such as a receipt. While the IRS does not mandate receipts for expenses under $75, keeping them is recommended. Maintaining contemporaneous notes is an effective way to ensure all required details are captured.