Since I am an entrepreneur, I can deduct all my meals, right?Nov 20, 2021
I hate to be the bearer of bad news, but unfortunately, you cannot deduct your daily Starbucks run or your weekly CEO luncheon 🙊.
What are business meals?
Business meals are deductible business expenses and most meals are deductible at 50%. That means that if you took your client out to lunch and spent $50, you would be able to deduct $25 of that from your tax return.
Note: There is a temporary exception to the 50% limit on deductions for food or beverages. From January 1st, 2021 through December 31st, 2022, your business can actually deduct the FULL amount of business meals at restaurants or bars.
So when can I deduct Starbucks runs?
A few conditions have to be met:
- The owner or an employee must be present.
- The meal must be with a business contact - this could be an employee, current or potential client, vendor, or consultant.
- The meal must be ordinary and necessary.
- The meal cannot be “lavish or extravagant”.
Out of the four above conditions, the one that gets people the most is number two. Number two says that in order to deduct a business meal, business must have been discussed before, during, or after the meal. AKA, you can’t be alone!
So no, you can’t wake up and decide you want fried chicken and use your business credit card to pay for it (dang it!!).
What about business travel meals?
If you are traveling for business, you can deduct the cost of meals, even if you are traveling alone. Those expenses would be subject to the same 50% rule.
How does this 50% rule work when I go to do my taxes?
Your tax preparer will make the adjustment for you! They will review your profit & loss statement, take your meals expense and divide it in half.
This is why it is so important that you are either 1) working with an educated and experienced bookkeeper, who asks questions and ensures they are bookkeeping your expenses correctly and/or 2) you educate yourself on these rules to ensure you are staying compliant.
I say both! Even if you have a bookkeeper, these rules are super important to be aware of.
How will the IRS know that I met those requirements?
In short, they won’t. They don’t have eyes on you at all times and there really is no way to prove that all of the conditions were met. They can, however, ask you to confirm that information and request documentation.
I always recommend keeping receipt documentation of all meals expenses. Personally, I have the Google Drive app on my phone. After noting who the meeting was with and what it was regarding, I snap a quick pic of the receipt and save it to a receipts folder in my drive. Here is an example:
You will want to make sure the following are noted:
- Name of the restaurant
- Who you met with
- Business purpose
Am I ever able to deduct meals expense in full?
There are a few instances where you can deduct 100% of business meals:
- A community or charitable event
- Company parties
It's time to stop losing sleep over spreadsheets.
Feeling lost when it comes to all things biz finances? It’s time to take DIY bookkeeping off your plate, so you can really step into your role of CEO.