I wanted to start this article with something funny about the topic. Let’s face it, taxes aren’t very funny, but saving money on them should make you smile. Learning about what types of meal deductions are available is complex but we are going to keep it as simple as we can. There are three types of food expenses: those you can deduct, those that you can’t deduct, and those you can deduct half of. Be warned that the rules get complicated and dry fast. We are only going to cover scenarios that I’ve seen small business owners run into a lot. I’ll try to keep it short and sweet. If you don’t see your particular situation covered you may want to reach out to your accountant. If you don’t have one, consider reaching out to us. We’ll be happy to help.
Advertising event where you provide food to the public.
If you host an event, perhaps with a bouncy hut and popcorn and cotton candy to raise awareness of your business the cost of the food is 100% deductible.
Sale of food to the public
If you are selling food to the public the cost of the food is 100% deductible. Be aware though that you may need to capitalize inventory if your business is ongoing.
Snacks for the break room (de minimis)
This rule comes into play when expenses are so small, relative to the size of your business that tracking them would not be cost effective. If you occasionally buy doughnuts for the break room or for a staff meeting you are probably ok. Just be sure to keep it reasonable and keep receipts and records of the business purpose of your meetings.
Annual Company Party
If your company hosts an event for employees, like an annual picnic, the cost of the food is also 100% deductible. The key here is “occasional”. Be sure to keep receipts and note the reasons for the special event.
The IRS says there are 2 situations where you can claim a 50% deduction on your meals.
The first is when you are so far from home that you need to sleep before coming back. This typically means that you spent the night at a hotel in the town you were visiting for business.
The second is meals as business-related entertainment.
If you take a client, potential client or even an employee out for a meal it can count as an entertainment expense. You must have a bonified business conversation and there should be “more than a general expectation of getting income or some other specific business benefit.”
When you record the cost of these meal and entertainment expenses simply record them at full value (they do need to be in their own category). Your tax person will adjust this to 50% when they prepare your taxes.
If your meal doesn’t fall into one of these categories it probably, alas, is not deductible. If you are eating alone in your home town it’s probably going to be counted as a personal expense by the IRS. A question that I get a lot is “what if I am a traveling sales person? I’m in the car for most of the day so I have to eat out. Can I deduct those meals?” Sadly, unless you met with the client over lunch, it is probably 0% deductible.
Here is a small thing to keep in mind. Some people I talk to seem to feel like having their business pay for lunch is like getting free food. I’ll admit that if you’re not the boss then it seems like a pretty good deal. However, if you are the boss the deduction really doesn’t save you all that much. Let’s do an example:
If you are in the 30% tax bracket and take a potential client out to lunch and spend $40. You can only deduct $20 (50% rule) as a business expense. What’s the tax savings: $6. The idea here is that if you think taking a client out will help seal the deal go ahead. Just don’t expect to save money doing it. Still, if conducting business over meals is how your line of work is done be sure to account properly so that you can take the deductions your business deserves.
Where can you find more information?
https://www.irs.gov/publications/p463/ IRS publication 463 has the IRS rules about Travel, Entertainment, Gift, and Car Expenses. It is long and will dry your eyes out but, if you want information straight from the source, this is the place to get it.
https://www.irs.gov/publications/p463/ch01.html#en_US_2016_publink100033781 This link will take you straight to the section on meals. Again the rules are surprisingly complex and you’ll find that you need to bounce around a bit in the document to find all of the relevant information.
Remember that taxes can be tricky so talk to your accountant before making any big changes. You want to be sure that what you plan to do makes sense in the context of your specific business. If you have questions about this, or another accounting topic, please feel free to reach out to us. The sooner you do the sooner you can properly take advantage of the tax breaks that you deserve.