Are Meals Tax Deductible in 2023?

The deductibility of meal expenses for tax purposes is a common question for businesses and individuals. While these expenses can offer a valuable tax benefit, the rules governing their deductibility are specific and have changed. Understanding the precise criteria for the 2023 tax year is important for accurate reporting and compliance.

Understanding Basic Deductibility

For a meal expense to be tax deductible, it must meet several requirements. The expense must be “ordinary and necessary” in carrying on a trade or business. An ordinary expense is one common and accepted in the particular business or profession, while a necessary expense is helpful and appropriate, though not necessarily indispensable, for the business.

The meal expense cannot be “lavish or extravagant.” This ensures only reasonable costs are deductible. A clear business purpose must also be directly associated with the meal, meaning there should be a business discussion, meeting, transaction, or negotiation occurring before, during, or after the meal.

The taxpayer or an employee of the taxpayer must be present at the meal for it to be deductible. Furthermore, the meal must be provided to a current or prospective business customer, client, or employee. These qualifying conditions establish whether a meal expense is eligible for any deduction before considering the applicable percentage.

Applying Deductibility Percentages

For the 2023 tax year, most business meals are subject to a 50% deductibility limit. This percentage limitation reverted from the temporary 100% deduction that applied to restaurant meals in 2021 and 2022, which was enacted to provide relief during the COVID-19 pandemic. As of January 1, 2023, that temporary incentive expired, and the standard 50% rule generally applies again.

There are specific exceptions where 100% deductibility for meals may still apply. Meals provided as de minimis fringe benefits to employees, such as occasional snacks or coffee in the office, can be 100% deductible. Additionally, meals provided for the convenience of the employer on the employer’s business premises might be fully deductible if certain conditions are met. Meals provided at company picnics, holiday parties, or other recreational activities primarily for the benefit of employees are also generally 100% deductible.

Navigating Different Meal Situations

The general rules and percentage limitations apply to various common meal scenarios. For business travel meals, those consumed while away from home on business are typically 50% deductible. This includes meals eaten during business conferences or while traveling for work.

Meals with clients or customers, where a substantial business discussion occurs, are generally 50% deductible. This applies whether the meal is with current clients, prospective clients, or other business contacts.

Regarding employee meals, different rules may apply. Meals provided for the convenience of the employer on the business premises, such as those offered to employees working late, can be 100% deductible and non-taxable to the employee if specific conditions are met. If employee meals are reimbursed, the employer is subject to the 50% limitation if the reimbursement is under an accountable plan.

Entertainment expenses, including tickets to events or club dues, are generally not deductible. However, if food and beverages are provided separately from an entertainment activity, their cost may still be 50% deductible if the meal meets the basic deductibility criteria. This requires the cost of the food and beverages to be stated separately from the entertainment on the bill.

Maintaining Proper Records

Thorough record-keeping is required to substantiate meal expense deductions. Taxpayers must maintain documentation that clearly shows the amount of the expense, which can include delivery fees, tips, and sales tax. The time and place where the meal occurred must also be recorded.

Detailed information about the business purpose of the meal is required, specifying what business was discussed or the nature of the activity. It is also necessary to document the business relationship of the person or persons attending the meal to the taxpayer, such as whether they are a client, customer, or employee. Common methods for documentation include retaining receipts and utilizing expense reports or digital record-keeping systems. For meals costing more than $75, receipts are required, but records should be kept for all business meals regardless of cost.