Thursday, June 13, 2024

How to chow down on Uncle Sam’s business meal deductions

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Financial advisors and tax professionals with entrepreneurial clients can help them feast on some tasty deductions for business-related meals — albeit at a lower rate than two years ago.

With the exception of certain noshing that is fully deductible and other kinds that come with no savings, business owners can generally claim 50% of the cost of meal expenses that are ordinary and necessary, according to a guide by the University of Illinois Tax School. A pandemic relief package had temporarily hiked the eligible deductible expenses to 100% for all non-lavish or extravagant meals purchased by businesses at a restaurant in 2021 and 2022. 

At the more limited level, alongside separate and more restrictive rules around entertainment costs under the Tax Cuts and Jobs Act of 2017, the meal deduction remains a potential item on business owners’ menus for possible deductions or tax credits. Other possible deductions or credits include those related to expenses from cars and home offices or those stemming from qualified business income for pass-through entities or qualified small business stock.

READ MORE: Tap overlooked tax breaks to help small business owners 

Advisors, tax pros and their clients should carefully consider how food and drinks may fit into any itemization strategies, according to Rupa Pereira, founder of Apex, North Carolina-based registered investment advisory firm FWJ Planning and Jerel Butler, a financial planner with Philadelphia-based RIA firm Zenith Wealth Partners.

The meals “should be ordinary and necessary, not lavish or extravagant,” Pereira said in an email. “The meals have to be substantiated — with date/place/amount/business purpose and business relationship between business owner and persons provided meals. If meals and entertainment are not separately charged, then it’s not a deductible business expense. Good recordkeeping is necessary to support reported expenses.”

In addition to guidance about the previously enhanced meals deduction, the IRS spelled out the rules for food and beverage expense claims in its primer on “travel, gift and car” costs.

“Advisors should be aware of the different thresholds for meal deduction and be able to advise clients based on the nature of their business and where certain types of meals will fall,” Butler said in an email. “Helping their clients to create a system to easily identify different types of potential deductions is really key moving forward.”

Taxpayers and their advisors should understand that the “IRS explicitly states that a meal does not necessarily have to be a requirement for it to be a necessary expense to qualify for the deduction.” Some misinterpret this as defining the word “necessary” as synonymous with “required,” according to the Tax School guide. The deduction applies to any food, beverage, tax or tips at a restaurant, but not to costs for entertainment or traveling to the meal, it noted.

“Business entertainment may include food and beverage at an event. The meal is only deductible if separately stated on the invoice or is otherwise billed independently from the rest of the entertainment expense,” the guide said. “Because the deductibility of meals during entertainment relies on the explicit statement or separation of the cost of food and beverages from the other entertainment costs, practitioners should relay the importance of maintaining records and documentation to their clients to support such deductions. Taxpayers with copies of invoices or itemized receipts can better defend their positions if challenged by the IRS regarding these expenditures.”

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In certain situations, the business owner could deduct the full cost of the meal. Those occasions include meals that are available to the general public, employee holiday parties or other social gatherings, food and beverages that are already part of a worker’s wages or those reimbursed as part of their moving expenses, according to the Tax School guide. On the other hand, meals for employees working from home aren’t usually eligible for any deduction, Butler noted.

“Typically the 50% deduction is for treating employees to a meal. Examples would be during team meetings, providing meals for employees working late and also meals for clients or customers,” he said. “Full deductions are available for large groups of employees or meals for promotional purposes that are available to the public.”

The employees themselves cannot deduct any reimbursed meal expenses, Pereira noted. 

“Meals are generally deductible if incurred while traveling on business or if provided to a client, customer or employee. It includes related tax, tips and delivery charges,” she said. “Food and beverages that are provided during entertainment events are deductible only if purchased separately from the entertainment, or if the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts.”

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