In case you’re not aware of the new rules regarding meals and food expenses in your small business the Tax Cuts and Jobs Act changed things up a bit starting in 2018. Business owners now have to reevaluate their budget for the food they once were able to deduct. Let’s take a deeper look and break out meals and food expenses by category.
Let’s also agree that meals and food expenses have one thing in common, they’re confusing. While many food-related expenses are still deductible, it’s important to understand percentage and staying clear of a raising a red flag.
Let’s look at the different meals expenses with 4 main options to consider and now to track expenses in your books.
1. Dining with a prospective client
Until 2018 this is the most common meals expense many utilize in their businesses. This deduction is usually 50% and until now has been deductible with no questions.
Unfortunately, many can argue that when the entertainment expense was completely repealed under the Tax Cuts and Jobs Act (TCJA), by default, it took the dining expense with it.
However, it appears that many tax professionals expect the IRS to offer guidance to ‘clarify’ this hotly debated issue. Specifically, it is expected that meals, unrelated to any entertainment experience, will STILL be deductible. Thus, I suggest continuing to track these expenses in 2018. We’ll wait for further guidance from Congress or the IRS to know for sure whether these meals and food-related expenses are truly deductible.
2. Meals and food-related expenses while traveling
You’ll be happy to know that there are no changes here! That’s good news for many of you.
Meals and food-related expenses while traveling outside of your normal tax home for your business are still 50% deductible. I’m talking about expenses for legitimate business purposes. For example, meals while traveling for a conference, checking on a rental property, traveling to a client’s business location, etc. are still deductible.
3. Meals with employees and food for them
Before the passage of the Tax Cuts and Jobs Act these were 100% deductible. However, they are now limited to 50%. These include expenses such as:
- Meals to hold a required lunch meeting on the business premises with your employees (not with your business partners or clients).(IRC Section 274(n)(2) 2018; 274(e)(1) 2018)
- Meals to hold a business meeting with your employees at an offsite location which passes the definition of a business premise. (IRC Section 274(n)(2) 2018; 274(e)(5) 2018)
- Snacks in the office for employees. For example, donuts on Monday morning, burritos for lunch on Friday, coffee, sodas, office snacks, etc.
- Meetings that include a lunch fee like a Chamber of Commerce event. (IRC Section 274(n)(2) 2018; 274(e)(6) 2018).
4. Parties for employees and workshops/presentations
These are 100% deductible. This would include food for an open house or open studios for artists. It would also include snacks or beverages provided as part of a promotional event for new or current clients. Basically, as long as the focus is not the food, but more an event that is non-entertainment, you can deduct the food expense.
This would include costs for a team building or retreat event or a holiday party for your employees. It would also include food at an event or workshop where clients paid to attend and the food was simply part of the cost of the event. Think an all-day workshop here where lunch is provided or beverages are served throughout the day.
*While a deduction is not currently under the new law, this is expected by experts to change before the next tax season.
Keeping track of expenses
With all that said, it doesn’t have to be complicated to keep track of all your expenses. Just understand the different ways to treat meals expenses and properly categorize in your books. It’s more important than ever to have good bookkeeping practices!
If you properly categorize your meals and food expenses, there should be no issues deducting them on your tax return come tax time. Plus, you’ll have the receipts and proper documentation to substantiate your deductions. It’s all about keeping organized and it’s best to do this as the expenses occur.
Food expense examples
In case you’re still not sure which category fits each expense properly, let’s take a look at some specific examples:
- Traveling to a conference where you buy breakfast, lunch and a dinner or two. Everyone must eat even when out of town. Deduction: 50% Category: Meals Expense
- While attending a conference, you take out a potential client to discuss business and close a deal. Deduction: 50% Category: Meals Expense
- Providing food for a required employee meeting at the office where the team discusses business operations. Deduction: 50% Category: Meals Expense
- Treating an employee to lunch for her birthday. Deduction: 50% Category: Meals Expense
- Hosting a company retreat where all employees meet at a location outside of the normal office. Business operations are discussed, there are team building activities and other business meetings happen. Deduction: 50%
- Treating a prospective client to a sports game or a concert followed or proceeded by a dinner or a meal. Deduction: 0% Category: Non-deductible expenses
- Meeting up with a business partner for lunch to talk about important business strategy. Deduction: 50% Category: Meals Expense
- Buying food for your restaurant or food truck as part of prepared meals. Deduction: 100% Category: Cost Of Goods Sold
- Hosting a training event where attendees pay to participate and receive a meal as part of the cost. Deduction: 100%
- Having an open studio, open house, or informative presentation which is free to prospective clients (think a Doterra class or a Beauty Counter makeover party) and you provide snacks, coffee or other food. Deduction: 100%
Finally, while there are some major tax-law changes as part of the Tax Cuts and Jobs Act, food expenses can still add up and be taken as a deduction on your taxes. Don’t discount them altogether, but understand the differences between the categories. Make sure you keep your books up-to-date with the different categories and you should be good to go!
What’s your question related to food, meals and entertainment deductions?