Hip, hip, hooray!
If you’re running a small business, then you should rejoice! Chances are you occasionally take prospective clients out for a meal or have a business meeting over lunch, right? Well, the IRS has officially released an update to the meals expense as part of the Tax Cuts and Jobs Act.
This is good news! Rejoice!
Meals expense is officially back on the table as a legitimate business expense and deduction. It’s still only a 50% deduction, but this is great news for digital nomads.
No need to worry about taking this on your 2018 tax return.
Let’s take a look at what the update says.
Under this new IRS guidance, you may deduct 50 percent of any client and prospect business meals if
- the expense is an ordinary and necessary expense under Internal Revenue Code (IRC) Section 162(a) that is paid or incurred during the taxable year in carrying on any trade or business;
- the expense is not lavish or extravagant under the circumstances;
- the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- the food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- in the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Proof for meals expense
This part hasn’t changed. You must provide proof for the meals expense.
To prove your business meals, follow the two easy steps below:
- Keep the receipt that shows the name of the restaurant, the number of people at the table, and an itemized list of food and drinks consumed.
- On the receipt, record the name or names of the person or persons with whom you had the meal and also record the business reason for the meal.
To make it simple to keep this receipt, I suggest taking a photo of immediately. This way the receipt gets digitally recorded and there’s no need to panic should you misplace the original.
In case you don’t get a receipt, make sure to make a written note of the expenditures immediately afterward. For example, if you take a business client to a baseball game and purchase food and drinks while sitting in the stands,
If you charge a business meal to a credit card, the statement provides your proof of payment. When possible, I always recommend paying by credit card or writing a check so there’s clear proof of payment. This helps avoid any issue later during an audit.
Proof of payment is not proof of what you purchased, so in addition to proof of payment, keep the receipt with the notations as described earlier. With this combination of proof of payment and receipt with notations, you have what we call audit-proof documentation.
If you would like to review your business meal deductions with me, please get in touch.
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[…] The old law allowed client and prospective client meals to be 50% deductible as long as it was related to a trade or business. The new law changed the language for meal deductions. However, the IRS has issued guidance that business meals with clients continue to be deductible. Read more about business meals deduction here. […]
[…] you discuss business with your customers, clients, or employees over a meal, coffee, etc. then the cost of your meals may be deductible as a business expense. The meal MUST be directly related to or associated with your business. […]