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For many business owners, being able to deduct meal and entertainment expenses can be incredibly helpful for marketing and conducting client matters.
As I wrote last year, (See: Last year’s post on deductibles here) COVID-19 impacted this area of US tax law.
Though the Tax Cuts and Jobs Act (TCJA) of 2017 altered the “meals and entertainment” tax rules by making entertainment an entirely non-deductive expense and reducing meal tax deduction to 50%, changes were implemented last year as a response to the pandemic.
However, things have reverted back for corporate taxes in 2023.
Unfortunately, the value of the meal deduction is halved for 2023 in comparison with 2022 and entertainment deductions are largely ineligible whereas certain deductions were made last year.
As indicated in the TCJA, meals are again eligible for either 50% or 100% deductibility.
However, in both the case of meals and entertainment, the purpose or circumstance is critical to whether or not the expense is eligible for a deduction. This can be tricky at first, but here are some guidelines to simplify and outline what is or is not deductible in 2023.
As aforementioned, meals will be deductible for either 50% or 100% in 2023, depending on the purpose of the meal and the meeting.
Here are tax deductions that will be 50% deductible:
Business meals with clients
Meals while traveling for work
Food items for the office
Meals at a conference
Here are tax deductions that will be 100% deductible:
Dinner for employees working late at the office
Food for company holiday parties
Food and beverages given to the public
Treating 50% or more of your employees to a meal (a 50% deduction applies if treating less than half of all employees)
How to know what is considered a deductible expense
The guidelines above should offer some clarity regarding what counts as a deductible business meal. But there are some other guidelines or aspects that could render your expense ineligible.
Meals that are considered “lavish” or “extravagant” cannot be deducted. However, the IRS will not consider a meal lavish or extravagant if it “is reasonable based on the facts and circumstance.” This means that even if you are dining at a deluxe restaurant or hotel, your expense can still be considered for a deduction.
Grocery and convenience stores that mostly sell pre-packaged goods that are not meant for immediate consumption are not regarded as restaurants
Employer-operated eating facilities are also not qualified as restaurants, even if managed by a third party service
Also worth noting is that transportation costs to and from the restaurant are NOT considered part of the cost of a business meal.
How to receive your deductions for meals
Keeping records of relevant expenses is important to securing that you receive your deduction from the IRS. Though the IRS does not require receipts for meals totaling less than $75, you should still keep some sort of record for the expense. Things to note include:
Total price of the meal after tip
The date of the meal
Who was in attendance
Name of the restaurant
How it related to your business and what matters were discussed
Again, entertainment expenses are largely ineligible for tax deductions in 2023. But, there is still hope! While things like golf expenses and sports games can not be deducted, there are several exceptions that allow for entertainment-related deductions, including:
Expenses for events like company holiday parties
Events like rewards trips
Expenses for business meetings like chamber meetings, conferences, etc.
Additionally, if your business involves the selling of entertainment, you can be eligible for expenses like hiring a comedian to play at your venue.
Overall, the return to TCJA rules means that there are generally fewer opportunities for deductions than in 2022. Meals will typically be considered 50% or 100% deductible, and most entertainment costs for marketing or client contact will have to come out of pocket. That means it is even more critical to be savvy about navigating and ensuring you secure the deductions you are eligible for this year. Understanding and staying updated on the rules of deductions can help you make the right decisions for your business in 2023!
If you are a business looking for advice on meals and entertainment tax deductions, Ryan Reiffert can help you. He is a lawyer with extensive knowledge about business, estate planning, and related laws in the state of Texas.
Contact us at (210) 817-4388 to schedule an initial consultation.