What Percentage of Business Meals Are Deductible?

Understanding the deductibility of business meals is important. Tax laws surrounding meal expenses have undergone various changes, making it important to stay informed about current regulations. Properly categorizing and substantiating these expenses can significantly impact a taxpayer’s financial obligations. This guide aims to clarify the percentages and requirements for deducting business meal costs.

General Rules for Business Meals

Most business meals are subject to a 50% deductibility limit. To qualify for this deduction, the meal must be an “ordinary and necessary” expense in the conduct of a trade or business, meaning it is common and accepted in the industry and helpful for the business. The expense should not be lavish or extravagant under the circumstances.

A taxpayer or an employee must be present at the meal. A business discussion must occur during, or immediately before or after, the meal. This establishes a direct connection between the meal and a legitimate business purpose, such as discussing a client project or negotiating a contract.

Specific Meal Deductibility Scenarios

While the 50% rule applies broadly, some meals are 100% deductible, and others are not. Meals provided for the convenience of the employer on the employer’s business premises are 100% deductible. This includes meals for employees working late or on weekends. Meals for employee recreational or social activities, such as holiday parties or company picnics, are also fully deductible.

De minimis fringe benefits, like occasional meals, coffee, or donuts provided to employees, are 100% deductible. Meals treated as taxable compensation to an employee and reported on their W-2 are also fully deductible by the employer. Personal meals or those associated with entertainment activities are generally not deductible. The Tax Cuts and Jobs Act of 2017 eliminated the deduction for most entertainment expenses, even if business is discussed.

Substantiation Requirements

Claiming business meal deductions requires thorough record-keeping to satisfy Internal Revenue Service (IRS) requirements. Taxpayers must retain documentation for each meal expense, detailing:

• The amount of the expense, covering food, beverages, taxes, and tips.
• The time and place of the meal, including the date and the name and location of the restaurant or venue.
• A clear business purpose for the meal, explaining the nature of the discussion or activity.
• The names and business relationships of the people for whom the expense was incurred, such as customers, clients, suppliers, or employees.

Accurate and timely records, like receipts and detailed notes, are crucial for supporting claimed deductions in an IRS audit.