Deducting 100% of Meals and Entertainment
Many of us heard and understand that only 50% of business meals and entertainment is deductible for tax purpose, however there are some exceptions to this general 50% limitation rule. By properly identifying and coding business meals and entertainment in your books and records, you can potentially save some money you end up owing to federal and state governments.
Before going over these exceptions to the 50% limitation, let’s go over the general rule of deducting meals and entertainment. In order to deduct meals and entertainment expenses, the expense must be directly related to, or associated with the active conduct of a trade or business, or for the production of income. In other words, if they are not for bona fide trade or business, or incurred in connection with the production of income, no deduction is allowed.
If the incurred meals and entertainments are business expenses, the rule provides that 50% is deductible in ‘general.’ The rule also provides substantiation requirement in which you must retain and substantiate business purpose. Records can be items such as receipts, credit card statements, or invoices and must provide (1) amount, (2) date, (3) location, (4) business purpose, (5) nature of business discussion, and (6) name and title of person involved.
Internal Revenue Code (“IRC”) section 274(e) provides exceptions to this general 50% limitation. In other words, you may be able to claim 100% deduction for these exceptions, including:
- Meals and beverages provided to employees on the employer’s premises for the employer’s convenience, if more than 50% of the employees are furnished meals and beverages. A good example is where you are providing meals to the employees in order to keep them working late, working weekends, or being on call.
- Employer-provided social/recreational expenses primarily for the benefit of employees who are not highly compensated such as a summer picnic, banquets, or Christmas party.
- Office snacks and beverages provided to employees on the business premises.
- Expenses treated as compensation. An example would be taxable overtime meal reimbursement to employees. Or expenses includable in income of personal who are not employees.
- Meals and food as part of a charity sporting event are fully deductible.
- Expenses for goods, services, and facilities made available to the general public.
- Employee recognition expenses including birthday lunches, award dinners, welcome/retirement gatherings.
- Career development expenses including mentor lunches and goal-setting meetings.
The above provides a good guidance and sense of types of business meals and entertainment that you may be entitled to 100% deduction, rather than 50%. However, taxes are complicated and there are many exceptions. So we recommend that you seek for advice from your tax advisor before taking such position on your return.