As a tax and bookkeeping firm, we understand the importance of keeping track of your small business expenses and maximizing your tax deductions. One area of confusion that we see the most frequently for small business owners is the deductibility of meals and entertainment expenses. Here, we will provide guidance on when it is a qualified business expense to purchase a meal at a restaurant and what has changed in recent years.
Meals and Entertainment Expenses
The tax code has always been clear that only ordinary and necessary expenses incurred while carrying on a trade or business are deductible. This includes meals consumed while away from home on business. However, the Tax Cuts and Jobs Act of 2017 made significant changes to the deductibility of entertainment expenses, making it so that entertainment expenses are no longer deductible. This includes entertainment expenses for events such as greens fees, sports games, concerts, and shows.
It is important to understand the difference between a small business entertaining a client and a marketing expense. A meal expense that is directly related to or associated with the active conduct of a trade or business is considered a business expense. On the other hand, an expense for entertainment is considered a personal expense and is not deductible. Marketing expenses would be when you throw an event to gather all of your clients or prospective clients in one place and market your services to them. the expenses related to marketing are deductible, as long as they are ordinary and necessary.
Meals for Employees
Another common question small business owners ask is whether they can deduct the cost of meals provided to their employees. The answer is yes, in certain circumstances. The cost of meals provided to employees for the convenience of the employer is deductible as long as it is reasonable and ordinary. For example, if an employee is working late and the employer provides them with dinner, this would be considered a deductible business expense.
Recently, I have had clients with no employees trying to write off meals for the team, I had to explain, "you don't have a team!"
If you have an employee retreat (and you actually have employees!), food expenses - along with other expenses- related to the retreat would be deductible.
Meals for Convenience
However, not all meals are considered a deductible business expense. If the meal is consumed primarily for personal reasons, it is not deductible. For example, if a small business owner is working late or working over lunch and grabs McDonalds, for their convenience, this is not deductible.
In conclusion, it is essential for small business owners to understand the rules and regulations surrounding the deductibility of meals and entertainment expenses. By keeping accurate records and following the guidelines provided by the tax code, small business owners can maximize their tax deductions and minimize their tax liability. As always, if you have any questions about your expenses or the tax code, we are here to help. Our goal is to help keep you in compliance!