Meals and Entertainment Deductions:
Taking clients or colleagues out for meals and entertainment can be a great way to build relationships and help your business grow. But because of recent changes to tax rules, it’s important to know what entertainment and meal costs are tax-deductible and how to document them properly. This blog post will explain the current rules for business meals and entertainment deductions and point out important points to make sure your company stays in line and gets the most tax breaks possible.
Key Takeaways:
- Business Meals with a clear business purpose can be Partially Deducted (50%).
- Entertainment Expenses are generally Not Deductible.
- Specific Exceptions like holiday parties and employee meals might have full deductibility.
- Proper Record-keeping with receipts is crucial for claiming Meals and Entertainment Deductions.
Meal Expenses: 50% Deductible with Conditions
Business meals can be partially deducted under specific circumstances:- Business Purpose: The meals must be directly related to your business, involving current or potential clients or employees during work travel.
- Reasonable Cost: The cost should be reasonable and customary for the situation. Extravagant spending won’t be deductible.
- Taxpayer/Employee Presence: Someone representing your business (you or an employee) must be present at the meals.
- Proper Record Keeping: Keep receipts with a separate itemization of food and beverage costs. The cost of food should not be combined with the entertainment spending.
Meals Expenses: 100% Deductible with Conditions
In some cases, meal expenses can be deducted 100%. These cases can be as follows;- Meals are included as employee/contractor compensation. In this case, the cost of the meals provided is included in the income of such an employee or contractor, and hence the company can claim 100% deductions.
- Business meetings focused solely on work. If employees are attending a meeting that is solely focused on bringing the business, the company can claim 100% deductions for food provided at such a meeting.
- The cost of the Meals provided to participants during business retreats or off-site training events are 100% deductible.
- Employer-sponsored recreational activities like holiday parties.
Entertainment Expenses: Generally, Not Deductible
Since 2018, entertainment expenses like sporting events, concerts, or club memberships are not deductible. This aims to prevent businesses from misusing entertainment as a tax write-off. So, it is essential to differentiate the expenses for Meals and Entertainment. The following are considered as entertainment expenses and are not eligible for deductions;
- Activities considered as Entertainment, Amusement or Recreation
- Membership dues of Clubs Organized for Business, Pleasure, Recreation or Social Purposes and
- Any facility or portion thereof used in connection with these activities
Example:
Imagine taking a client to a business lunch to discuss a potential partnership. The cost of the meals can be partially deducted (50%) if the above criterias are met. You’ll need to prove the business nature of the meeting with a receipt showing separate food and beverage charges.
Important Case Studies of Meals and Entertainment Deductions:
Case 1: Client Lunch
- Scenario: A salesperson takes a potential client to a lunch meeting to discuss a new sales opportunity.
- Analysis: This qualifies for a 50% deduction as it’s a business meal with a potential client.
- Requirements:
- The cost must be reasonable for the area.
- A receipt with separate food and beverage charges is needed.
- The salesperson must be present at the lunch.
Case 2: Holiday Party
- Scenario: A company throws a holiday party for its employees and their families.
- Analysis: This qualifies for a 100% deduction as it’s considered a fringe benefit for employees.
- Note: Lavish expenses exceeding usual holiday party standards might not be fully deductible.
Case 3: Golf Outing with a Client
- Scenario: An executive takes a client golfing to discuss a potential deal.
- Analysis: This is not deductible. Entertainment expenses like golfing are generally not allowed, regardless of the business discussion.
Case 4: Catered Business Meeting
- Scenario: A company holds a business meeting with a presentation and lunch for the attendees.
- Analysis: The cost of the lunch portion is 50% deductible, assuming it meets the requirements for business meals.
- Note: The presentation and meeting space rental costs are likely fully deductible as business expenses.
Case 5: Employee Appreciation Lunch
- Scenario: A company provides free lunch for its employees every Friday.
- Analysis: This might qualify as a de minimis fringe benefit, meaning it’s a small benefit the company can provide tax-free to employees. However, starting in 2026, even these deductions might be eliminated.
How can BusAcTa Advisors help?
Don’t risk your business due to changing taxes. Our tax-savvy experts can help you:
BusAcTa Advisors provides offshore accounting and tax preparation services; where you can ensure the following from us- Making expense tracking easier with an efficient accounting system and file storage system.
- Identifying deductible expenses to ensure you have maximized your claims of accurate deductions.
- Lower your tax bill with proactive tax planning.
