Are Lunches a Business Expense? What You Need to Know

Businesses incur various expenses, and understanding which can be deducted for tax purposes is important. Meal expenses frequently raise questions due to specific rules and limitations. Taxpayers must navigate these carefully to ensure compliance with tax law and reduce taxable income.

Understanding Meal Expense Deductibility

For a meal to be considered a deductible business expense, it must meet certain criteria established by the Internal Revenue Code (IRC). IRC Section 162 states that expenses must be “ordinary and necessary” to be deductible. An ordinary expense is common and accepted in your trade or business, while a necessary expense is helpful and appropriate, though not necessarily indispensable.

Beyond being ordinary and necessary, business meals must also meet specific tests to qualify for a deduction. The meal must have a clear connection to a business event, such as a discussion, meeting, or negotiation. This means the primary purpose of the meal should be for business furtherance, not personal enjoyment. The taxpayer or an employee of the taxpayer must be present at the meal. Additionally, the expense cannot be lavish or extravagant under the circumstances.

Following the Tax Cuts and Jobs Act (TCJA), entertainment expenses are generally not deductible. This includes costs for activities like sporting events, theater tickets, or golf outings. However, meals consumed during a business discussion, even if they occur in conjunction with an entertainment activity, may still be deductible if the cost of the food and beverages is stated separately from the entertainment on the receipt or invoice.

Applying Deductibility Limits and Scenarios

Specific percentage limits apply to deductible meal expenses. Qualified business meals are subject to a 50% deductibility rule under Internal Revenue Code Section 274. This means only half of the allowable meal expense can be deducted, including meals incurred while attending professional seminars or traveling away from home.

Different scenarios impact how meal expenses are treated for tax purposes. Meals incurred while traveling away from home for business are subject to the 50% limitation, provided they are not lavish and the taxpayer is present. For travel meals, taxpayers can choose to deduct either the actual cost or use a standard meal allowance, known as the Meal and Incidental Expense (M&IE) rate, which varies by location.

Certain meals can be 100% deductible, forming exceptions to the general 50% rule. Meals treated as compensation to an employee, or those provided for the benefit of employees at a company picnic or holiday party, can be fully deductible.

Essential Recordkeeping for Meals

Thorough recordkeeping is necessary to substantiate meal expenses for tax purposes and to withstand potential IRS audits. For each meal expense, taxpayers must record specific details. This includes the exact amount spent, the date the meal occurred, and the name and location of the restaurant or vendor.

It is also crucial to document the business purpose of the meal, explaining how it relates to the trade or business. Additionally, the business relationship of the people entertained or present at the meal must be noted. For instance, this could include clients, customers, or business contacts.

Maintaining contemporaneous records, meaning keeping records at or near the time the expense is incurred, is important. Common types of documentation include original receipts, invoices, and credit card statements. Supporting details can also be captured through calendar notes or dedicated expense logs and apps, which help organize the required information.