Business Meals & Entertainment Expenses

Several months ago, I did an article regarding the deductibility of business travel, meals and entertainment.  In this article I would like to revisit some of these issues, as it has been brought to my attention that many businesses are not deducting as much for theses expenses as is allowed.  The percentage of deductibility for meals and entertainment is somewhat confusing and I am hoping that by giving businesses more details on these matters, it will increase their awareness, as well as their business expense deductions, in the future.

Do I need to keep receipts for all meals related to my business?

While it is a good idea to keep receipts and/or a journal documenting all meals and entertainment expenses, receipts are only required for meal expenses of $75 or more.  Documentation of entertainment and meal expenses should include the amount, date, place, people entertained, type of entertainment, business purpose, and business relationship, and notes on the business discussion which occurred immediately before, during or immediately after the meal.

The IRS only allows a 50% deductions for meals and entertainment.  Why do I have to keep such detailed documentation?

It's true that most business expenses for meals and entertainment are only deductible at 50%.  However, some of these expenses are fully deductible.  The documentation is necessary in the event of an audit.  Whether your expense is 50% or 100% deductible, you would hate to have a portion of these deductions disallowed because of lack of documentation.

I was not aware that any meals or entertainment expenses were 100% deductible.  How do I know the difference between a 50% and 100% deductible meal?

The Tax Code has three basic categories that apply to the 50% limitations.  They are:

1. Entertaining clients or customers.
2. Business travel away from home.
3. Attending business conventions, meetings or luncheons.

Chances are if your expense does not fit into one of these categories, it can be fully deducted.

What are some examples of expenses that are 100% deductible?

The following expenses would qualify for a full deduction:

1. Meals provided to employees related to social or recreational activities.  For instance, a company Christmas party, annual picnic, or retirement party would all be fully deductible provided that they include a nondiscriminatory class of employees.
2. Meals that are provided to employees for the convenience of the employer.  These could include meals provided due to short lunch periods, unavailability of nearby eating facilities, necessity of employees being available at all times for emergency phone calls, and meals furnished to food service employees during and immediately before or after their working hours.  Also, meals provided to employees immediately after working hours that would have been provided during working hours for a business purpose, except work duties prevented employees from eating during working hours are included in the 100% deductibility category.  
3. If a meal is provided to more than half of the employees for the employer's convenience, the employer can then deduct meals provided to all employees at 100%.
4. “De minimis” fringe benefits meals also qualify for the 100% deduction.  This includes meals that are provided infrequently or cost so little that it is not worth the time spent to fully account for them.  Examples would be an occasional meal or meal money provided to employees who work late hours or perform work-related duties outside the normal workday, or coffee and doughnuts. 
5. Under the de minimis rule, 100% deductibility may also be allowed for meals provided to “promote goodwill, boost morale, or attract prospective employees.”
6. Meals provided to several prospective clients at one time at which a marketing presentation is made are also 100% deductible.

I was not aware of the 100% deduction for these expenses and have expenses in past years that would qualify for the full deduction.  Can I still get credit for the remaining 50% deduction that wasn't taken?

Yes.  Provided you have adequate records to document such expenses, you can amend your tax returns for up to three prior years and claim the full deduction.  The dollar amount of the additional deduction will no doubt play a role in your decision to amend prior returns. 

And remember, documentation is the key.  The IRS is aware that many businesses do not keep adequate records for meals and entertainment expense, thus creating an audit target.

How can I be sure that I am taking the full allowable deduction on meals and entertainment expenses in the future?

The best way to assure yourself that you are taking these expenses to your fullest advantage is to learn the deduction categories well and keep adequate records documenting these expenses.  Also, teach your employees about the meals and entertainment deduction categories and how to keep records containing the necessary information.

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