Did you know that your coffee runs, client lunches, and even office parties could lower your tax bill? Business meal and entertainment expenses can be valuable deductions, but only if you know the rules. If you’re unsure whether a particular expense falls into one of the below categories, consult with your bookkeeper or other financial expert.
The following meal and entertainment expenses are not deductible:
- Sporting event tickets
- Transportation to/from a restaurant for client business meals
- Club memberships and club-related expenses
- Meals during entertainment that are not listed separately on the invoice
The following types of expenses are 50% deductible:
- Water, coffee, and snacks at the office
- Meals provided in the office during meetings of employees, stockholders, agents, or directors
- Meals during business travel
- Meals at a seminar or conference
The following types of expenses are 100% deductible:
- Meals provided for the convenience of the employer (such as meals for occasional employee overtime)
- Meals included in charitable sports packages
- Meals included as taxable compensation to an employee or independent contractor
- Meals sold to a client or customer
- Food offered to the public for free
- Office holiday party or picnic
- Team-building events
What about entertainment costs?
Most entertainment expenses are not deductible, but there are some exceptions. You can deduct expenses for events (like the company holiday party or a rewards trip) and costs tied to business meetings (think chamber meetings, professional associations, or even a conference).
If you sell entertainment to your customers, there are exceptions to the entertainment deductions. For example, if a bar owner pays a band to perform for customers, the band’s fee would likely be a deductible business expense for the bar owner.
Here are 5 ways you can make the most of business meal deductions
#1 Bring in food for your employees
Expenses for food and beverages provided on the business premises primarily for the benefit of employees are 50% deductible. This rule applies to a wide range of employee activities, such as office parties, team building days, etc. If you choose to go offsite for these activities, the cost of the facility may be fully deductible too.
#2 Build relationships over a good meal
If an employee takes a client or customer out for a meal at a restaurant, you’ll be able to deduct 50% of the cost as long as the meal isn’t overly lavish. The relationship could be with anyone the taxpayer or employee could reasonably interact with in the active conduct of business—including current or prospective customers, clients, suppliers, employees, agents, partners, and professional advisors.
#3 Hit the road
Meals from restaurants during business travel are 50% deductible. Just remember that long-standing rules for substantiating meal expenses still apply. For example, deductions are not allowed for meal expenses incurred during business travel by those who aren’t business associates (such as spouses, dependents, or other individuals).
#4 Offer snacks to your customers
Make your customers feel at home, create a positive association with your business, and take a tax deduction! Expenses for food and beverages that are made available to the general public (such as the customers who come to see you at your premises) are 100% deductible.
#5 Have some fun!
Expenses for team-building activities and office parties are generally 100% deductible, provided they are primarily for the benefit of employees and are not overly lavish. These expenses include costs associated with food, beverages, venue rentals, and entertainment during the event. To qualify for the full deduction, the event should be open to all employees and have a clear business purpose, such as fostering team cohesion or celebrating company achievements.
Bookkeeping tips for tracking business meal expenses
- Meal receipts are among the most commonly misplaced documents, so take extra care of them. Note the business purpose of the meal, as well as the business relationship between you and your dining companion(s).
- Create a new account for expenses that are strictly for business entertainment purposes and designate business meals.
- Keep travel expenses (including meals while traveling) completely separate from entertainment.
- Create a separate category for employee social meals, such as parties, picnics, team-building events, staff mentoring, etc.
Not sure what other business expenses are deductible?
We have put together a comprehensive guide of the top small business tax deductions that will leave you feeling relieved this tax season. In this guide, you will find small business tax tips, detailed examples, and strategies for tracking expenses, giving you a better understanding of how to take advantage of these tax savings.
Download our comprehensive Guide to Small Business Tax Deductions.