Yes, it can get confusing. Meals and entertainment expenses are often misunderstood. The rule is not if the business pays, it is based on what the business is paying for.
In general, 50% of the expenses are deductible unless an exception under applies that permits 100% of the expenses to be deductible. However, if the meals expense is bundled with an entertainment expense, it may not be deductible at all.
Most work-related meal purchases you can think of are either 100 or 50 percent deductible. But there are a few exceptions. For example, if you pay for your clients’ night out but you don’t actually go with them, it’s nondeductible. The same applies to a client meal at a restaurant where you invite friends or spouses - the cost of your friends is nondeductible (but you can write off half the client bill).
And of course, with the Tax Cuts and Jobs Act, client entertainment is also nondeductible—no more golf games or courtside tickets.
Below are some examples of typical business meal and entertainment expenses and the amount the business can deduct. It is important to note that in some cases, it is going to be important to break out credit card charges to ensure the correct deduction.
Client Lunch
Aaron takes his client Bubba out to lunch and spends $60.
50% of the food and beverage expenses are deductible, totaling $30.
Employee Lunch
Carla takes her employee Derek out to lunch and spends $70.
50% of the food and beverage expenses are deductible, totaling $35.
Hotel Business Meeting
Eric holds a business meeting at a hotel, during which food and beverages are provided to attendees. He spends $250 on facility charges and $600 on food and beverages.
The total deductible expenses are $250 for the facility charges and $300 for 50% of the food and beverage expenses, totaling $550.
Basic Sporting Event
Adrienne invited Barbara, a major vendor of her business, to a baseball game to discuss a proposed business deal. Adrienne spent $100 on tickets and $50 on food and beverages during the game.
The ticket cost is a nondeductible entertainment expense, and 50% of the food and beverage expense is deductible, totaling $25.
Fancy Sporting Event
Carlita invited Daniel, a significant business customer, to a basketball game to discuss a new business line she is offering. She purchased suite tickets to the game, where they can access food and beverages. The cost of the suite tickets was $500, including the food and beverages, and the amount allocated to the food and beverages was not separately stated.
The entire ticket cost is a nondeductible entertainment expense because there is no separate statement of the food and beverage costs. The takeaway here is to always get a detailed bill.
Travel Meals
Frances, a sole proprietor, and her spouse, Susan, travel from New York to Boston to attend a series of business meetings related to her business. Susan is not an employee of the business and does not travel to Boston for business purposes. While in Boston, Frances and Susan go out to dinner. They spend $200 on food and beverages, with the costs equally divided.
Susan’s meal expenses are nondeductible, while 50% of Frances’s meal expenses are deductible, totaling $50.
Employee Holiday Party
Luis invites all his employees to a holiday party in a hotel ballroom. The party costs $2,500 and includes a buffet dinner and an open bar.
Since the holiday party is a recreational, social, or similar activity primarily for the benefit of non-highly compensated employees, both the facility costs and the food and beverage expenses are 100% deductible.
Working Employee Meals
Northwinds has a written policy that employees in certain positions must be available during meal periods, Northwinds furnishes food and beverages to employees in this position without charge.
Because these food and beverages are furnished for the employer's convenience and are not primarily for the benefit of the employees (even if some socializing occurs), Northwinds may deduct 50% of the food and beverage expenses.
In Conclusion
Navigating the rules around business meals and entertainment deductions can be tricky, but understanding the distinctions is crucial to maximizing your tax benefits while staying compliant. The key takeaway is that it’s not about who pays, but rather what the business is paying for. By following these guidelines and staying informed about exceptions, businesses can avoid costly mistakes and make the most of the deductions available.
