Meals and Entertainment

For many years, meals and entertainment had the same tax treatment and many people in the business community would often talk about meals and entertainment together.   You could deduct 50% of the cost of both of those items through a business entity, so the link between the two made a lot of sense.  You've always been required to document the business purpose of these expenses, and that hasn't changed with the various changes to their deductibility over the last few years.  For 2021 and 2022, many meals were 100% deductible while entertainment was 0% deductible.  Now for the 2023 tax year, meals are back to 50% deductible and entertainment is still 0% deductible, generally.  However, it is important to know how to you might be able to get an even better deduction than the 50% for meals and the 0% for entertainment.

Meals

There are a few ways that you can deduct 100% of your business meals.  I'll outline a couple of those ways below.

The first way is by having a company-wide party.  Whether it is an employee appreciation gathering, a summer party, a Christmas party, or something similar - those meal expenses are 100% deductible.  As such, make sure that you record those differently in your accounting records.  This would also include treating your employees to a meal as long as it was for more than half of your employees.  If it's a meal with less than half of your employees, then it's back down to the 50% deduction.

Another way to get a 100% deduction for meals is by having the food available free of charge to the public.  So, if your company sponsored an event (like a race or a golf event) and you provided some type of snacks for the attendees, then those food items would be 100% deductible.

Outside of the above items (and a few others), the deduction limit for meals is 50%.  Make sure all your meals (whether they are 100% or 50% deductible) are supported by a business purpose and keep track of the receipts as best as you can.  The IRS has some guidelines on what documentation they require when deducting meals.

Additionally, if you have employees that travel or if you travel for work - remember that the IRS allows a per diem deduction instead of your actual costs of meals.  So, be sure to adopt a per diem policy if your company has a lot of travel.  A lot of my clients get a better deduction under the per diem calculations - so I encourage you to look at that possibility.

Entertainment

Entertainment is a tricky topic - especially when the deduction dropped from a 50% deduction down to 0%.  Many business owners want their sporting event tickets, their golf outing or other similar activities to be deductible in some form.  They may want to categorize those types of activities as public relations or advertising.  After all, the people that they want to go with are all clients or prospective clients, right?  Just because a business owner may want to treat an expense a certain way doesn't mean it will hold up under an IRS audit.  So, proceed carefully if you are trying to deduct entertainment expenses. Hopefully the IRS will make changes to allow some deduction for entertainment expenses in future years, but for 2023 those items are nondeductible.

Non-lavish recreational expenses for an employee party or a summer picnic do still qualify for a deduction - which is consistent with the 100% deduction of meals mentioned previously in this article.  Apparently the IRS doesn't want to discourage business owners from taking good care of their employees.

Conclusion

Meals and entertainment can still lead to some tax savings, but the rules around those expenses have recently changed.  I suspect that they may also change in the future, so be sure to maintain good records of those expenses and continue to be in touch with your CPA about any rule changes about those expenses.  If you have any questions, please reach out to me and we can schedule a lunch. :)

The information in this blog post is for general informational purposes only and is not intended as legal, accounting, or tax advice. Tax laws can change, and the application of information may vary. Readers are strongly advised to consult with their CPA or a qualified tax professional for personalized guidance tailored to their specific situation. This blog post is not a substitute for professional advice, and we disclaim all liability for actions taken based on its content. Always consult a qualified professional for advice on your individual tax situation and business circumstances.