This post will tell you if your meals are tax deductible. There’s a simple answer for most of us, and a deeper answer for business owners.
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As I march along the path to financial freedom, I’m learning that taxes are incredibly important. The more income you have, the bigger of an impact taxes have on your ability to build wealth. This was one of the main reasons why I decided to switch my investing strategy to favor real estate.
There are a lot of expenses in your day to day life that add up to a lot of money. One of these expenses is food, specifically meals that you eat while you’re at work.
Most have to pay for our food at work (unless you’re at a cool tech company in Silicon Valley). For the rest of us, either we pay for food from grocery stores and bring it to work, or we buy food from the company cafeteria or local restaurants.
Can we deduct these meals against our income taxes?
It turns out a lot of people wonder about this, so I thought I’d look into this and help answer this question. I’m glad I did, because my understanding of this was actually incorrect. Now that I’ve done my research, I’d like to share it with you!
(Note: this is not official tax advice or legal advice. Please consult with your tax advisor for that.)
Here’s the summarized answer that will answer the question for most people reading this:
- W2 employees cannot deduct meal expenses
- Businesses can claim a business meal deduction for qualifying meals (see below)
- In 2022, some business meals are 50% deductible, and some are 100% deductible
If you get paid on a W2, you’re basically out of luck. No tax break for you! Have a great day.
If you’re a business owner, it’s a little more complicated. You can keep reading. Big business owners probably don’t care, but small businesses may benefit from this information below.
It pays to be a business
As I’ve mentioned before, our tax law exists to encourage certain types of activity. In this case, it’s trying to encourage you to form a business. Why? Because businesses are good for the economy. Businesses create jobs and push the economy forward.
So if you are a business owner, you’re in luck. Meals that are a business expense are deductible.
What is a business expense?
It helps to define first what is a business expense. A business expense any cost incurred in the ordinary course of business.
A general concept in the American tax code is that business expenses should be tax deductible because they’re necessary for the business to function. These costs are deducted against the business’s income and are not taxed.
An example
Let’s say you run a small business that manufactures specialty baseball bats. Here are some examples of common business expenses you might incur:
- Advertisement costs
- Company picnics
- Delivery fees
- Equipment
- Office lease payments
- Travel expenses
- Wages for your workers
- Occasional meals for workers
The costs for these business expenses would be non-taxable (fully tax deductible) because they’re both normal expenses for your type of business, and necessary for your business to function.
Take it to the extreme
But let’s extend this example to see why the IRS tax code is 2600 pages long. Let’s say your specialty baseball bats are selling well, but you want to really kick things up a notch. You want a wealthy investor to buy 25% of your company. So you call up this investor and propose a special business trip to Las Vegas.
You fly the investor and her business associate out first class from New York to Las Vegas and get them the best hotel suite available at the Bellagio. You also rent a luxury skybox at the stadium to watch the Las Vegas Aviators play a baseball game. Things are going well, so you spring for the most expensive steak dinner available in Vegas and then bottle service at XS Nightclub.
The business trip goes well and you close the deal with the investor. The weekend cost about $150,000, but “at least it’s deductible,” you say to yourself as you nurse your hangover. You save all your receipts, cross your fingers, and then send it all over to your CPA.
The bad news
On Monday, your CPA tells you that since the Tax Cuts and Jobs Act, several parts of your expensive weekend will not be tax deductible. Specifically, these four things are not deductible:
- Sporting event tickets
- Transportation to/from the restaurant for client business meals
- Club memberships and club-related expenses
- Meals during entertainment that are not listed separately on the invoice
This part of the tax code basically disqualifies many types of entertainment activity from being deductible. For example: a round of golf at the country club, or the cost of the tickets for a football game or a basketball game? They’re not going to be deductible.
“But these were all for business reasons!” you yell over the phone at your CPA as your blood pressure rises. You snap your fingers and ask: “Wait — I listed the dinner meal separately on the invoice. I can deduct that meal, right?”
Your CPA disappoints you again. The cost of meals from the steak restaurant are so high that it’s likely to be considered “lavish and extravagant.” So you’re out of luck again.
What business meals are deductible?
For a business meal to be deductible, it has to satisfy these tests:
- The meal is not lavish or extravagant.
- A substantial business discussion took place before, during, or after the meal
- There was a business purpose for the meal.
- The cost of the meal was not included in an entertainment-type ticket.
- An owner of the business attended the meal.
If it satisfies these tests, it’ll fall into one of two categories: 50% deductible or 100% deductible.
These meals are 50 percent deductible
- Meals during business travel
- Meals at a seminar or conference
- Meals provided for the convenience of the employer
- Meals included in charitable sports packages
- Meals in office during meetings of employees, stockholders, agents, or directors
- Client business meals (if the taxpayer is present and it’s not lavish or extravagant)
Note: due to the Covid-19 relief bill, the above items are 100% deductible if they’re from a restaurant (2021-2022 tax years only). This is to help the restaurant industry survive the pandemic. There was further IRS guidance that clarified that onsite cafeterias don’t count for the 100% full deduction.
These meals qualify for a 100% percent deduction
- 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
Water, coffee, and snacks at the office are only 50% deductible.
References:
- Expenses for business meals from the IRS
- Final guidance from the IRS related to meals and entertainment
- Temporary 100% deduction for restaurant food from IRS
There have to be limits
Our lawmakers know that it’s normal for a business to spend money trying to attract a prospective client. But every time a business owner offsets their company’s income by claiming a deduction on a lavish entertainment event or expensive business-related restaurant meals, the IRS receives less in taxes.
So depending on the presidential cycle, the tax codes get tweaked to permit more or less deductions for business owners. But regardless of the changes, you can see that there are many more opportunities to decrease your taxable income as a business than as an employee.
Conclusion
Employees can’t deduct the cost of their regular meals at work. Businesses can deduct the cost of business meals if those meals meet certain criteria. The cost of the meals has to be within industry norms and not extravagant, and unfortunately entertainment costs are generally not deductible since the Tax Cut and Jobs act.
There is a lot of gray in the tax code, so it’s frequently revised, clarified, and amended. But I fully believe that the tax code (for all of its faults), is the clearest voice of the will of the government. Because nothing speaks more clearly than money.
If you want to get the biggest advantages in growing your wealth, listen to the government and invest your capital in ways that qualifies for the biggest tax deductions.
This doesn’t help the average employee, but if you have a side business or invest in real estate, this advice might come in handy.
–TDD
Do you tax deduct your meals from your income? Let me know down in the comments below!
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