Business meal deductions a complete guide

Business meals are a common expense for many companies, whether it's taking a client out to lunch, ordering food for a staff meeting, or eating while traveling for work. The good news is that these expenses can be deductible on your business tax return, potentially saving you money at tax time.

However, navigating the rules surrounding business meal deductions can be tricky. From understanding what qualifies as a deductible meal to keeping the right records, there's a lot to know.

In this comprehensive guide, we'll cover everything you need to maximize your business meal deductions in 2024. We'll explain the current rules, discuss record-keeping requirements, and share strategies to optimize your deductions. Let's dive in!

Understanding the current rules for Business meal deductions

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the way businesses could deduct meal expenses. Under the TCJA, most business meals are 50% deductible. This 50% limitation applies to food and beverages provided by a restaurant.

However, there are a few notable exceptions where business meals may be 100% deductible:

• Company parties and picnics: The cost of food and beverages served at company parties, picnics, or outings that are primarily for the benefit of employees and their families are 100% deductible.
• Meals included in taxable compensation: If you include the cost of meals as taxable compensation to employees, those meals are 100% deductible.
• Meals sold to the public: If your business sells meals to the public, such as a restaurant or catering business, those meals are 100% deductible.

It's important to note that in order to deduct any business meal, it must be considered ordinary and necessary for your business. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business.

What qualifies as a deductible Business meal?

To be deductible, a business meal must meet certain criteria. Here are some key factors that determine if a meal qualifies as a deductible business expense:

Business Purpose 

The primary purpose of the meal must be to conduct business. This means you must engage in a bona fide business discussion before, during, or after the meal. The IRS doesn't specify how much time you need to spend discussing business, but it's a good idea to document the business purpose of the meal.

Some examples of meals with a clear business purpose include:

• Meals with clients or prospects where you discuss business opportunities
• Meals with employees to talk about work projects or performance
• Meals while traveling for business purposes
• Meals at business conferences or conventions

Substantiation Requirements 

To deduct a business meal, you must be able to substantiate the expense with proper records. This includes:

• The amount of the expense
• The date and place of the meal
• The business purpose of the meal
• The business relationship of the people at the meal

You should keep receipts for all business meals, especially those over $75. For smaller expenses where it may not be realistic to get a receipt, such as grabbing a quick coffee with a client, make sure to record the details in a logbook or expense tracker app.

50% vs 100% Deductible Meals

As mentioned earlier, most business meals are 50% deductible, but there are some exceptions where meals may be 100% deductible. Make sure you categorize your meals appropriately to maximize your deductions.

Strategies to maximize your Business meal deductions

Now that you understand the basics of deducting business meals, let's look at some strategies to optimize your deductions:

Separate Your Meal Costs 

If you have a receipt that includes both food/beverage costs and entertainment costs, make sure to separate out the meal portion. The TCJA eliminated the deduction for most entertainment expenses, so you can only deduct the business meal part of the expense.

For example, if you take a client to a baseball game and buy hot dogs and drinks, you can deduct 50% of the cost of the hot dogs and drinks bought separately from the game tickets.

Maximize 100% Deductible Meals 

Take advantage of the situations where meals are 100% deductible. This includes throwing company parties or picnics, including meals as taxable compensation, or selling meals to the public.

Document Everything

The key to deducting business meals is having proper records. Get in the habit of saving receipts, noting the business purpose of meals, and logging the details of each expense. Having a digital system like a receipt scanning app or expense management software can make this process much easier.

Your documentation should paint a clear picture of the who, what, when, where and why of each business meal. The more detail, the better. 

Consider Using a Business Credit Card

Using a dedicated business credit card for your meal expenses can help in a few ways:

1. It automatically creates a paper trail of your expenses
2. It makes it easier to categorize meal costs separately from other expenses
3. Some cards may offer bonus rewards on dining purchases

Just be sure you can pay off the balance each month to avoid interest charges eating into your deductions.

Understand the Special Rules 

Be aware of some special rules that may affect your meal deductions:

• If you are subject to Department of Transportation (DOT) hours of service limits, such as interstate truck drivers or airline pilots, you can deduct 80% of your meal expenses while traveling away from home, instead of the standard 50%.
• If you are reimbursing employees for their meal expenses, those reimbursements may be treated differently for tax purposes depending on whether you have an accountable plan or non-accountable plan.
• There are also special rules regarding meal expenses related to charitable sports events.

Working with a tax professional can help ensure you are applying these special rules correctly.

Putting it All Together: An Example 

Let's look at an example to see how these business meal deduction strategies come together.

ABC Company holds a team building event at a local restaurant. The total bill comes to $1,000, which includes $800 for food and drinks and $200 for renting out a private room. Because the primary purpose of the event is for the benefit of the employees and not to conduct business, ABC Company can deduct 100% of the cost of the food and drinks, which is $800.

However, the $200 room rental fee would likely be categorized as an entertainment expense, which is not deductible under the current rules. So in this case, ABC Company could deduct $800 of the total $1,000 spent.

Leveraging Your Business Meal Deductions with Instead 

As you can see, properly tracking and categorizing your business meal expenses can lead to significant tax deductions. But keeping up with all the rules and record-keeping requirements can be time-consuming, especially if you frequently dine out for business.

This is where Instead can help streamline the process. Instead is an AI-powered platform that helps businesses and their accountants identify and maximize tax deductions, including those for business meals.

With Instead, you can:

• Easily track and categorize your business meal expenses
• Get AI-driven insights and recommendations for optimizing your deductions
• Store digital records and documents to substantiate your expenses
• Generate reports to simplify your tax filing process

Plus, Instead integrates with popular accounting software, making it easy to sync your data and stay organized.

Remember, Every Meal Counts

In the world of business, meals are about so much more than just food. They are opportunities to build relationships, close deals, and motivate your team. And with the right strategies, they can also be opportunities to save on your taxes.

By understanding the rules, keeping diligent records, and leveraging tools like Instead, you can ensure you are getting the most out of every business meal. Those small write-offs can really add up over the course of the year.

So the next time you pick up the check at a business lunch, remember - that meal isn't just fueling your body and your business, it's fueling your bottom line too. Bon appétit!

Ready to start maximizing your business meal deductions? Sign up for Instead today and put our AI-powered platform to work for you. Click here to get started.