Is Alcohol Deductible as a Business Meal?

Business expenses can reduce a taxpayer’s taxable income, but specific rules govern which expenses qualify for a deduction. Business meals, in particular, often lead to confusion regarding their deductibility. An additional layer of complexity arises when alcohol is part of a business meal, prompting questions about whether such costs can be included in a deduction. This article clarifies the criteria for deductible business meals and specifically addresses the treatment of alcohol consumed during these meals.

Qualifying Business Meal Expenses

For a business meal to be considered deductible, it must meet several specific Internal Revenue Service (IRS) requirements. The expense must first be “ordinary and necessary” for the business, meaning it is common and accepted in the industry and helpful for conducting the trade or business. An expense is considered ordinary if it is typical in a particular line of business, and necessary if it is appropriate and helpful for the business operation.

Beyond being ordinary and necessary, the meal cannot be considered lavish or extravagant given the circumstances. This means the cost should be reasonable and not disproportionately high for the business purpose served. The taxpayer or an employee of the taxpayer must be present during the meal for it to qualify for a deduction.

A business discussion must occur before, during, or after the meal to establish its business purpose. This discussion should relate to the active conduct of the taxpayer’s trade or business, such as securing new business or developing existing relationships. Without a clear business purpose and discussion, the meal generally does not qualify as a deductible expense.

For tax years beginning after December 31, 2022, the general deduction limit for qualifying business meals is 50% of the expense. This 50% limit applies to most business meals, including those with clients, meals while traveling for work, and food for in-office meetings.

Deductibility of Alcohol Within Meals

Alcohol consumed as part of an otherwise qualifying business meal is deductible, subject to the same 50% limitation as the rest of the meal expense. For example, a glass of wine with a client dinner where business is discussed would fall under the 50% deductible meal expense. The total cost of the meal, including alcohol, taxes, and tips, is subject to the 50% deduction limit.

It is important to differentiate alcohol purchased as part of a qualifying meal from alcohol purchased for entertainment purposes. The Tax Cuts and Jobs Act (TCJA) of 2017 made entertainment expenses, including associated alcohol, generally no longer deductible. This means taking a client to a sporting event or a concert, and purchasing drinks there, would not be deductible if the alcohol costs are not separately stated from the entertainment.

However, if food and beverages, including alcohol, are purchased separately from an entertainment activity, or if their cost is stated separately on the invoice, then the meal portion may still be 50% deductible. For instance, if you take a client to a hockey game and also purchase food and drinks with a separate bill, the game tickets are non-deductible, but the food and drinks may be 50% deductible. The key distinction is whether the alcohol is an incidental part of a business meal or primarily part of a non-deductible entertainment activity.

Essential Recordkeeping for Meal Deductions

Accurate and detailed recordkeeping is paramount for substantiating any business meal deduction, including those that involve alcohol. Taxpayers must maintain specific information for each meal expense claimed. This includes the amount of the expense, which should cover the total cost of the meal, including any alcohol, taxes, and tips.

The time and place of the meal must also be recorded, providing a clear context for the expense. Additionally, the business purpose of the meal needs to be clearly documented. This involves explaining how the meal benefited the business, such as fostering client relationships or discussing specific projects, and including a summary of the business discussion that took place.

Furthermore, taxpayers must record the business relationship of the people entertained or dined with, including their names, titles, or other designations. This information helps establish the legitimate business connection for the expense. Maintaining contemporaneous records, such as receipts, credit card statements, and detailed notes or logs, is strongly recommended.

Receipts for expenses over $75 are generally required, but accurate documentation is important for all meal expenses regardless of the amount. A good practice involves writing a short memo on the receipt detailing who was met, the business purpose, and what was discussed.