Tax Deductions: Meals
Here at Beyond the Books, we are constantly getting questions on what is and isn't deductible. Follow this guide for the 2023 IRS rules related to Meals!
Business meals have always been a cornerstone of conducting business. Whether dining with potential clients, discussing business over lunch with partners, or even grabbing a meal while traveling for work, these expenses can accumulate. Understanding how the Internal Revenue Service (IRS) treats these expenses is crucial for businesses aiming to maximize deductions while remaining compliant with tax codes.
1. Historical Perspective:
Traditionally the IRS has allowed businesses to deduct meals under certain circumstances, recognizing that many business discussions and decisions occur over food. Historically, a 50% deduction was permitted, provided the meals were not "lavish or extravagant." You will often hear the terms "ordinary and necessary" when discussing tax deductions - just be cognizant of what is considered reasonable.
2. Criteria for Deductibility:
For a business meal expense to be deductible:
Business Association: The primary purpose of the meal should be business-related.
Not Extravagant: The cost shouldn't be lavish or extravagant under the circumstances.
Presence: An owner or employee of the business should be present at the meal.
Documentation: Detailed records and receipts must be maintained. This includes the date, amount, place, business relationship, and purpose of the meal.
3. Changes Brought About by the Tax Cuts and Jobs Act (TCJA) of 2017:
The TCJA brought about significant changes:
Entertainment Expenses: Previously, businesses could deduct 50% of entertainment expenses if they were directly related to business. The TCJA disallowed these deductions, creating a clear distinction between meals (still deductible) and entertainment (no longer deductible).
4. Special Provisions in Light of COVID-19:
To provide relief during the pandemic and support the restaurant industry, special provisions were made:
For 2021 and 2022, the IRS allowed 100% deductibility for meals from restaurants, as long as they were business-related.
5. Considerations for 2023 and Beyond:
While the 100% deduction was a temporary provision, businesses should be alert to any legislative changes or IRS clarifications for subsequent years.
6. Meals from Groceries and Other Non-Restaurant Outlets:
The IRS does not typically differentiate between the source of the meal, whether it's a restaurant or a grocery store. The context in which the meal is consumed and its relation to business activity is of primary importance. If the meal is business-related and meets all other criteria, it can be considered for a deduction.
7. Practical Implications for Businesses:
Given the evolving nature of tax rules, businesses should:
Stay Updated: Regularly check for legislative changes or IRS updates regarding meal deductions.
Maintain Documentation: Regardless of changes in deductibility percentages, maintaining clear and detailed records remains paramount. Search our blog about receipt requirements from the IRS.
Consult Professionals: Engage with tax professionals or accountants for tailored advice.
Conclusion:
The taxability of business meals has evolved over time and may continue to do so in response to economic, social, and legislative changes. By staying informed and proactive, businesses can ensure they leverage these deductions effectively while remaining compliant.
