Meal and Entertainment Expense Deduction

Q: Tax Playa, can I deduct the cost of business-related meals and entertainment off my taxes?
Tom, Wilmington DE

A. Tom, in general meal and entertainment expenses are deductible, but only to the extent of 50% of their cost.  There are many caveats and conditions for this, including your relationship to your business, if you are a truck driver, and a few other weird odds and ends.

For more information on this topic, consult IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses."

In order for a meal (and for the purposes of this discussion, I will generally mean any meal or entertainment when I say "meal") to be deductible, it must meet several criteria:

1. If traveling, only if it is necessary for you to stop or rest while away from home on business
2. The meal cannot be lavish or extravagant
3. The meal must be "directly related" to business (main purpose of entertainment was business or it took place in a business setting) or "associated" to business (substantial business discussion took place immediately before or after the meal)

The bottom line here is that if it seems like a business-related meal, it probably is.

An additional restriction is that meal and entertainment expenses are generally only 50% deductible.

The tax rules vary depending on your position vis-a-vis the business:

1. You are an employee of a business, including your own

If you are an employee of a business (including your own) you may or may not be reimbursed by the business for the expenses.  If you are not reimbursed, you can take a deduction as an "unreimbursed employee business expense."  You can only deduct 50%, you can only take this when you itemize your deductions, and your miscellaneous itemized deductions (unreimbursed employee expenses, tax prep fees, and the cost of earning income) must first be reduced by 2% of income.

As a result, most employees who don't get reimbursed are out of luck.

If your employer does reimburse you, he can do it in one of two ways.  He can either fully-reimburse you for your meal expense, or he can give you a "per-diem" rate based on the area you were in when you took on the expense (you can also use the per-diem rate in lieu of the 50% of actual expenses if you are claiming the unreimbursed business expense deduction).

2. You are the owner of a business (including sole proprietors, partners, S-corporation owner-shareholders, and owners of corporations)

In this case, the business can reimburse you 100%, but can only take a 50% deduction on their business return.  Alternatively, the business can pay you the per diem and take the expense as a deduction.

3. You are an airline employee, railroad employee, merchant marine, or truck driver

Thanks to a special rule for you, 70% of your meals are deductible (rising to 80% in 2008).  This is to recognize that truck drivers are usually on the road and have little choice but to get meals there.

There are a few exceptions to the lessened limit on deductions besides the transport worker and per-diem provisions.  These include:

• The self-employed who bill their clients can take the full expense against this billing (the client is then subject to the limit)
• The meal can be provided as advertisement to the general public and be fully-deductible
• If you are in the business of selling meals or entertainment to the public, the expense is fully-deductible
• If the meal or entertainment is part of a charitable event sports package, it is fully deductible

Comments

[Sunday]

Hi,

If my AGI is 250,000, and I incured unreimbursed meals and entertainment expenses for $40,000, what is the estimate of my after tax cost.

Thanks,
Sunday

[Luis Watts]

I am presently arguing with the IRS over Travel Expenses. I was posted by my company in Slovakia for a bit less than a year. I was paid a per diem of $125/day. The Federal Government rate for Slovakia was about $290/day. I am claiming the difference as an unreimbursed business expense. It is my understanding that this is allowed. If I was paid more than the Government rate I would have to pay taxes on the overage and I understand the converse to also be true.