Business or Just Lunch? The IRS Wants to Know.

Conditions for Business Meal Deductions

Budgeting for your personal finances is different than tax accounting for a small business. You generally cannot deduct meal expenses unless you (or your employee) can demonstrate the expense is a deduction. All of the following conditions must be present to deduct a business meal:

1. You or your employee were present at the meal
2. Alcohol and other non-deductible costs were not included in the receipt for the meal
3. There was a business purpose (entertainment is never a business purpose)
4. It's not considered a gift, earnings, or a fringe benefit (meals are considered fringe benefits unless there is an exception)
5. The cost is not lavash or extravagant under the circumstances (ordinary and necessary)

Categorizing Meal Accounting

When you account for business meals you need to sort them into separate categories; by default meals are includable in the employee's W2 earnings as a fringe benefit. Business tax accounting will show the meals have a clear business purpose and are not fringe benefits. Typically, this is something managed by a bookkeeper; not the tax preparer. One way to do that yourself is to use a receipt scanner app on your phone, or reimbursement system. The process for tracking meals is similar to tracking mileage. QuickBooks has a mobile app to assist with receipt capture -- common for most bookkeeping software.

• During the pandemic (2021-2022) there were different rules to help restaurants get back on their feet.
• Cash gifts and gift cards must be included in W2 wages for employees to be deductible. See Rules for gifts (aka de minimis fringe benefits).

Tracking Meal Categories

Here are some of the categories for meals that need to be tracked:

• Business Client/Travel Meals (50%)
• Employee Party (100%)
• Gifts under $100 (100%)
• Non-deductible Cash & Gift Cards (0%)
• Non-deductible Owner Meals, groceries & entertainment (0%)

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