How to Approach the Complexities of Business Meal Deductions

Business expense deductions remain one of the best ways to reduce your tax burden. However, they can be complicated. Business meal deductions are among the most complex areas, with various rules about when and how much to deduct.

Breaking these rules can result in you owing back taxes and getting into trouble with the IRS, but not understanding them may mean you pay more taxes than you owe. If you routinely travel, eat with vendors or clients, etc, then this can add up and become a substantial amount.

The Basics of Business Meal Deduction

You can only deduct a meal if it is part of legitimate business, and there are some fairly strict rules about what does and does not qualify.

What Qualifies as a Business Meal?

A business meal is one that is inherent and integral to business. This typically means:

• All meals eaten during business travel away from home
• Meals eaten at/during a conference, seminar, workshop, professional meeting, etc
• Meals eaten with a business contact, such as a customer, employee, vendor, or consultant
• Meals that are part of your business function...if buying the meal is essential to your business, it's deductible. This generally applies to specific people like food bloggers or restaurant critics.
• Meals that are not "lavish or extravagant."
• Meals that are directly related to business, such as taking an employee out to lunch as part of a one-on-one.
• The owner or employee must be present.

If you are doing hybrid travel, you can only deduct meals that happen during the business section. However, if the purpose of the trip is primarily business, you are fine. For example, if you get to a conference a night early to save travel stress, you can deduct the dinner you eat that night even if the conference hasn't started yet. However, if you are on vacation, you can't deduct meals unless they are directly part of a business deal. For example, you go on vacation to San Francisco, and while you are there, you meet up with a freelancer who often does projects for you and lives there. In that case, you can deduct the meal you eat with them if you're discussing business.

It’s important to note that you cannot deduct your routine lunch.

Recent Changes to Meal Deduction Rules

During 2021 and 2022, there was an enhanced deduction rule that allowed you to deduct 100% of a meal eaten at a restaurant (normally you can only deduct 50%). This was intended to help restaurants recover from the pandemic. It sunsetted in 2023 and no longer applies moving forward.

The 50% Deduction Rule Explained

For the vast majority of business means you can only deduct 50% of the cost. The argument made is that you need to eat anyway and thus the 50% rule covers the difference between eating at a restaurant and eating at home.

The rule applies to all foods and beverages that count as a business meal, with a few minor exceptions. This means that you should divide the total cost of the meal, including taxes and tips, by two and then round down to claim the deduction.

Understanding the 100% Deduction for Business Meals in 2023

The temporary 100% deduction for all restaurant meals sunsetted at the end of 2022 and can not be used for 2023 tax filings. So, the vast majority of business meals are deductible only at 50%.

However, there are a few circumstances in which a meal can be 100% deductible.

Criteria for the 100% Deduction

With that sunsetted, only a few meals still qualify. Here are the criteria:

• The meal is a key part of your business. This covers restaurant critics, food bloggers, and similar. As a critic can't assess a restaurant without buying their food, the meal becomes 100% deductible.
• The meal benefits at least half of your employees or the general public.
• The meal was reimbursed by your employer, client or customer (for contractors, your client is subject to the 50% limit).

Examples of Eligible 100% Deductible Meals

Here are some examples of meals that would be eligible:

1. A restaurant critic orders a meal at a restaurant he intends to review. He takes a friend along with him to solicit their advice. This meal is 100% deductible.
2. A food blogger purchases lunch while on vacation and then writes a column about the dish or the restaurant. The meal is 100% deductible (but her vacation expenses are not deductible).
3. An employer buys donuts and coffee for the entire office to take the sting out of the morning meeting.

Again, the vast majority of meals purchased in 2023 are only 50% deductible.

Eligibility Criteria for Business Meal Deductions

In some cases, it's really obvious that a business meal is deductible. You are at a conference and visit a food truck between sessions, for example. However, it can be complex in certain circumstances.

Directly Related vs. Associated With Tests

One thing that makes a business meal deductible is if it is "directly related" to your business. The easiest way to make a meal business-related is to discuss business during the meal. For example, you may have lunch with a new freelancer, during which you discuss your social media calendar. This doesn't mean you have to talk business the entire time. But if you go to lunch with an employee and spend the entire time discussing the fun vacation they just went on, that's not deductible. You should write a clear record of the purpose of the meal and keep it in the scenario that you get audited.

Another criteria is "associated" meals. This refers to meals which occur before or after a more formal business meeting. While business may not be discussed during the meal, these meals are clearly associated with a business activity. An example would be heading to lunch with a customer after a sales call. The meeting must be for business, with some expectation of benefit.

Any meals that don't meet this criteria are not deductible. You can't deduct a fun evening out just because one of your employees is present.

Lavish or Extravagant Meals: Where to Draw the Line?

A place where people often stumble is the vague "must not be lavish or extravagant." Is a steak house lavish or extravagant? Is there a dollar amount?

The problem is that neither "lavish" nor "extravagant" has a clear definition or a clear precedent. The IRS provides little guidance and no specific dollar amount. So, what might make a meal "lavish or extravagant?" The only standard you can apply is common sense. Ask yourself this: Is the restaurant particularly expensive relative to other restaurants in the area? The IRS doesn't require that you eat at McDonald's. A $100 meal might not raise eyebrows in Vegas, but that same dollar amount might count as “lavish” in a small town.

In truth, there have been no instances where a court has ruled a meal lavish or extravagant. It's unlikely that any typical business travel meal would cross the line, no matter how expensive the hotel restaurant is. Use common sense and make sure to record the number of people present so a meal doesn't look more expensive.

Meals with Clients, Colleagues, and Solo Work Meals

A meal with a client or colleague, as long as business is discussed, is obviously deductible. But what if you take your laptop to a restaurant to keep working through lunch?

Solo meals are not deductible. Working through lunch or taking a call from the cafe does not make it deductible because the meal is not inherent to the activity. A lunch with a client is "goodwill." You can't give yourself goodwill.

Obviously, if you are traveling, then it is deductible. But a solo work meal a block from your home office is not.

Documentation and Record-Keeping for Meal Deductions

You need to keep proper records in case you get audited. Thankfully, this is fairly simple.

What Records You Need to Keep

For all business meals, you should keep the following:

• The original receipt from the restaurant, grocery store, or convenience store (Yes, you can deduct a ready-to-eat sandwich you purchased for lunch during a conference).
• A record of the business purpose of the meal and who it was with. Or, alternatively, a note of which conference or meeting you were attending.

Best Practices for Receipts and Expense Reports

Avoid paying for meals with cash if possible. This may not always be avoidable (you may get to the restaurant and discover they don't split checks, for example, even in 2023). Always use your business credit or debit card, not a personal card. Paper receipts should be attached to a written record as above and kept in a binder or file folder.

Electronic receipts should be stored in proper receipt management software. You need to keep receipts for at least three years. This requirement is much easier to tackle when deploying expense management solutions.

How to Keep Track of Meal Expenses Digitally

The best way to track meal (and other) expenses is to use accounting software that digitizes receipts and attaches them to records. Note that you should still keep the original receipt as the IRS may ask to see it. Proper bookkeeping software will also automatically drop the amount by 50% when it is in the "meals" category, saving you a lot of math.

Common Questions and Misconceptions About Meal Deductions

There are some common misconceptions about meal deductions that often lead people not to deduct things they are entitled to deduct.

Are Meals While Traveling Deductible?

Yes, as long as the primary purpose of the trip is business. For hybrid business and leisure trips, you can only deduct meals during the business part of the trip.

Can You Deduct Meals at Seminars and Conferences?

Mostly. If the seminar or conference requires travel, yes. If it is all day and it is not reasonable for you to go home or to your office to get food, yes. However, if it is two hours in the afternoon, then that would not be deductible. 

The Truth About Alcohol and Meal Deductions

A lot of people think you can't deduct alcohol. The truth is you can deduct alcohol the same as any other food or beverage item. However, you need to think about "lavish or extravagant." One glass of wine or a cocktail is reasonable. Don’t be tempted to buy the $2000 bottle of Chateau Lafite Rothschild Pauillac, because that most certainly won’t win any favors for deductions or with your management team. 

How to Deduct Business Meals on Your Tax Return

Exactly how you deduct business meals depends on how you file taxes, but here are the general rules.

Line-By-Line: Reporting Deductions on Tax Forms

Meal deductions are a line item on the appropriate tax form, of which more will be said later. Your tax software will typically have a place where you can enter the deduction.

Timing of Deductions: When to Claim

You should claim meals in the calendar year in which you ate and paid for them. So a meal eaten on December 31 2022 would have been added to your 2022 taxes. One eaten on January 1, 2023, however, cannot be deducted until 2023.

Meal Deductions for Different Business Structures

Your business structure does not affect your ability to deduct meals. It may, however, affect how you record those deductions.

Sole Proprietorships and Partnerships

Sole proprietorships and partnerships put meal deductions on Schedule C (sole proprietor) or Schedule K-1 (partnerships) with their personal taxes. They should go on the line item marked "Meals and Incidental Expenses" or M&IE. Make sure to record them throughout the year.

Note that if you are recording your business income as hobby income, you cannot make deductions even if you itemize.

Corporations and S-Corporations

S-Corporations are pass-through entities, which means that S-Corp owners pay their own taxes and deduct expenses. You report your income and expenses on Schedule K-1. The majority of small businesses are S-Corps. If you elect the C-Corp structure, then the deductions are taken by the company, but this is typically for larger companies with more employees.

LLCs and How They Differ

LLCs are a special case. A small LLC is taxed as a sole proprietorship or partnership. The LLC doesn't file a return and the owner files a Schedule C. However, as an LLC grows, you may make a corporate tax election, which allows the LLC to be treated as an S-Corp or C-Corp. See more about LLCs and when to possibly switch to a different structure in our article, LLC to C-Corp.

The Role of Technology in Managing Meal Deductions

Technology makes pretty much everything related to taxes easier. You should use expense management software, but what are your options?

Expense Management Software Options

Some people use a spreadsheet to manage expenses. This is a cheap option, especially if you already have spreadsheet software, but it requires more work and is generally only a good idea if you are just starting out.

There are a variety of expense management software products out there, and the right one depends on what expenses you have, how much you travel, etc. Decimal can help you pick the best software for your business.

Integrating Meal Deductions into Accounting Software

Full-featured accounting software typically has an option to enter meal deductions as standard. Always use the software's option as it will apply the 50% reduction correctly. If you have been using a cheaper expense management option, make sure you choose accounting software that will import the data from it.

The Future of Automation in Expense Deductions

Things are getting very close to the point where you can scan a receipt, and it will recognize the source of the receipt and apply it to the correct expense category. AI may take this one step further. For example, your software knows you are in Denver for a conference, so it knows to add 50% of any meals eaten in Denver to your M&IE column. Your business credit card may even do this automatically!

Meal Deductions in the Context of Remote Work and Virtual Meetings

Most people have gone back to normal, but business travel has yet to recover. This is in part because many companies have realized virtual meetings are cheaper and, for some use cases, just as good. So, can you deduct during a virtual meeting?

Deducting Virtual Business Meals

You have a virtual meeting and don't have time to cook. You go outside and buy a meal from the food truck that stopped by. Can you deduct that? Probably not, as you are at your tax home.

However, if you have meals delivered to your employees during a virtual meeting, that may be deductible.

The Impact of COVID-19 on Business Meal Deductions

As already mentioned, there was a temporary enhanced deduction for business meals ordered at or from, a restaurant in 2021 and 2022. These meals became 100% deductible, but the deduction dropped back in 2023, and there has been no move to restore or extend it.

This was to help restaurants recover by encouraging employers to order food for their employees and encouraging people to go back to restaurants.

The International Aspect: Meal Deductions When Traveling Abroad

What if your business meeting takes place in Spain? Can you deduct that paella?

How International Meal Deductions Differ

If you are on an international business trip, you can deduct 50% of your meals exactly as if you were in the U.S. However, there is one major caveat: The IRS may not allow you to deduct an international trip at all.

The IRS has special rules for trips outside of North America (Canadian conventions thus fall under "domestic" for this rule). First of all, if the business trip is not entirely for business, you can't deduct anything. If you go to a three-day conference and then spend two weeks exploring Europe, you lose the ability to deduct the conference. Typically, the trip should be less than seven days and/or you should spend at least 76 percent of your time on work-related activities. Another criterion is how much control you had in planning the trip (which owners can't claim). So if you go to your three-day conference and then spend two days sightseeing, you can probably deduct.

Also, if you go to a conference, then you must show it was "as reasonable" to hold it outside the U.S. Typically, conferences planned by people who live in the area you are traveling to are considered reasonable...this rule is aimed at U.S. organizations that decide it would be fun to hold a conference in Brazil.

Tips for International Business Travelers

If you are traveling overseas, thus, bear in mind the following:

• Don't extend your trip too much, no matter how tempting it is, or you may lose the ability to deduct.
• Strongly consider the impact of conferences held overseas by U.S. organizations and possibly avoid them. 
• Keep full records of everything you spend in case you get audited
• Don't try to deduct the expenses of a spouse who travels with you to sightsee outside the conference. You may even have to drop the amount of the room you deduct. Talk to your accountant or tax professional to confirm.
• You may have to reduce the amount of your airfare you deduct.

Always talk to an accountant if you are going on an overseas business trip.

IRS Audits and Meal Deductions: Staying Compliant

If you get audited, travel expenses are often something the auditor will scrutinize. Here's a few things to consider.

Red Flags to Avoid in Meal Deductions

First, if you travel a lot, consider deducting using the per diem method, not recording costs. This throws up fewer red flags but may or may not be favorable.

The biggest red flag is large deductions for meals and travel expenses. This increases your chance of an audit, and you need to have really good records. The IRS will compare your deductions with people in the same industry and look at them if they are too high. Again, use common sense and don't try to deduct a really expensive bottle of wine from the best restaurant in town.

How to Prepare For a Possible Audit

Always have an accountant you can call in case you get audited and to get advice for your specific situation. Prepare for an audit by making sure all of your records are solid and easily accessible. Go through and correct any errors.

Get together everything the IRS requests. Make copies. Audits generally focus on a specific thing. If your travel expenses are under scrutiny, make sure you can show your reason for travel and the business reason for any meals. Never send the IRS any original documents, as you won't be getting them back.

Advanced Tips for Maximizing Business Meal Deductions

There are a few things you can do to maximize your business meal deductions, depending on your situation.

Strategies for Larger Companies

Remember you can deduct 100% of meals that benefit all of your employees. If you get breakfast for a meeting, consider whether it will be cheaper to provide breakfast to everyone, not just the employees attending. Employee parties are also always fully deductible.

Reimburse employees, always, which gives them and you both benefits. You can often deduct 100% of reimbursed expenses. Train employees to accurately report their expenses. Schedule "goodwill" meals immediately before and after meetings so they can be called associated, and make sure they are tied together in your records.

Deduction Tips for Small Business Owners and Entrepreneurs

Make sure that any meals you have with clients or prospects are documented as to their business purpose. You absolutely can deduct a lunch you buy for a prospect to seal the deal.

When traveling, look at your average expenses and see if taking the standard per diem deduction is more favorable. Always use your business credit or debit card to pay for meals and other expenses. If the restaurant only takes cash or won't split the check (Say you're at a conference and are enjoying a networking dinner with other attendees), then try to use petty cash, not your household cash. Be aware that if you pay cash and don't get a receipt, you will probably get away with deducting it but will likely lose out if audited.

Deduct What You Can, but Don’t Push the Limits

Deducting meals is actually fairly straightforward. You can deduct 50% of all meals eaten while traveling or with a business purpose, such as a lunch meeting. However, there are some special cases you need to be aware of, especially if traveling internationally.

The most important thing is to keep good records, and using modern expense management software is the best way to do it. You should also stay informed on tax law changes that might affect what you can deduct.

If you need personalized advice, Decimal has tax professionals on hand that can help you. Arrange a consultation with one of our experts, who can help you maximize your deductions and avoid those pesky audits.