How Much of Your Meals and Entertainment Is Deductible?

Understanding the deductibility of business meals and entertainment expenses is important for accurate tax reporting and maximizing allowable deductions. The Internal Revenue Service (IRS) provides specific guidelines to help taxpayers determine which expenses qualify and their deductible extent. Proper application of these rules can significantly impact a business’s taxable income.

What Qualifies as a Deductible Business Expense

For an expense to be considered deductible, it must meet the IRS criteria of being both “ordinary” and “necessary” for carrying on a trade or business. An ordinary expense is common and accepted in the particular industry. A necessary expense is helpful and appropriate for the business, though not necessarily indispensable.

Beyond being ordinary and necessary, business meal and entertainment expenses have additional specific requirements. The expense must be “directly related” to the active conduct of your trade or business, meaning the main purpose of the meal or entertainment was to conduct business, and business was actually discussed. Alternatively, an expense can be “associated with” the active conduct of business if it immediately precedes or follows a substantial business discussion. For a meal to be deductible, the taxpayer or an employee of the taxpayer must be present when the food or beverages are furnished.

The expense must also not be considered “lavish or extravagant” under the circumstances. While the IRS does not provide a fixed dollar amount to define lavishness, the cost should be reasonable given the business context. The expense must not be personal in nature; a clear distinction between business and personal outlays is required.

General Deductibility Rules

Most business meals are subject to a 50% deductibility rule. This applies to meals with clients, customers, or vendors where business is discussed, as well as meals consumed during business travel. The 50% limitation ensures that a portion of the meal’s cost, which might be considered personal in nature, is not deducted.

The treatment of entertainment expenses underwent a change with the Tax Cuts and Jobs Act (TCJA) of 2017. Under this legislation, most entertainment expenses are no longer deductible. This includes costs for activities like tickets to sporting events, concerts, or golf outings, even if they have a business connection.

When a meal is provided during an entertainment event, separate the meal costs from the non-deductible entertainment costs. If food and beverages are purchased separately or their cost is stated separately on the bill, invoice, or receipt, the meal portion may still be 50% deductible. For instance, if a business owner takes a client to a sporting event and buys food at the stadium, the food cost can be deducted if itemized separately from the game tickets.

Specific Situations for Deductibility

While the 50% rule applies broadly, some specific situations allow for 100% deductibility of meal expenses. Meals provided for the “convenience of the employer” can be fully deductible. This typically applies to meals furnished on the employer’s business premises during work hours, especially when employees are required to remain on-site for business reasons or during extended work hours. For example, meals provided in an on-premises cafeteria or during a late-night work session to keep employees productive may qualify.

Another category of 100% deductible meals includes de minimis fringe benefits. These are benefits with such a low value and infrequent provision that accounting for them would be administratively impracticable. Occasional snacks, coffee, or beverages provided to employees in the workplace often fall into this category. Employer-provided recreational, social, or similar activities primarily for the benefit of employees, such as holiday parties or annual picnics, are also 100% deductible.

Meals included as part of business travel expenses are typically 50% deductible, whether based on actual costs or per diem rates. Per diem rates are standardized allowances for meals and incidental expenses that vary by location and are updated annually by the General Services Administration (GSA). Meals provided to the public as a means of advertising or promoting goodwill, such as at a product launch event or open house, can also be 100% deductible.

Conversely, some meal expenses are entirely non-deductible. If the business purpose for a meal cannot be properly substantiated with adequate records, the expense will also be non-deductible.

Record Keeping and Substantiation

Maintaining accurate and detailed records is important for substantiating business meal and entertainment deductions. The IRS requires specific information to support these expenses. For each expense, taxpayers must record the amount, date, and place where the meal or entertainment occurred, including the name and address of the establishment.

Beyond these basic details, documentation must clearly state the business purpose of the expense. This involves describing the nature of the business discussion or activity that took place. The business relationship of the people involved must be recorded, such as clients, customers, or employees. For example, a log entry might state “Lunch with prospective client John Doe to discuss new contract terms.”

Taxpayers should keep various types of records to support their claims. Receipts for amounts over a certain threshold, commonly cited as $75, are generally required. Even for amounts under this threshold, a written record is still necessary.

Other supporting documents include credit card statements, detailed logs, calendars, and account books. It is best practice to maintain these records contemporaneously, meaning at or near the time the expense was incurred. This ensures accuracy and provides evidence if the deduction is ever questioned by tax authorities.