Like most business owners, you probably incur costs on wining and dining customers or clients. You’d think that this is an easy tax deduction, but you’d be wrong. The tax law is peppered with rules and limitations that curtail or prevent you from deducting meal costs you’d think would be a legitimate write off.
Here are five rules you need to know to optimize your deductions.
1. Only 50 percent is deductible.
You meet a customer for breakfast at the local diner or take a client to dinner at a fine restaurant. Provided the meal is for business and you’re not just socializing, you can only deduct 50 percent of the cost.
To be treated as a deductible cost at 50 percent, the meal must be directly related to the conduct of your business or the meal must directly precede or follow a substantial business discussion. For example, you’re trying to convince a prospect to do business with you in a meeting in your office. Following your presentation, you take the prospect to lunch. This would be a deductible business meal, subject to the 50 percent limit.
Special rules: There are several exceptions to the 50 percent rule, such as reimbursements to employees that are treated as taxable compensation to them or reimbursements to independent contractors for their meals; these are fully deductible. Also, those subject to Department of Transportation limitations on hours of service, such as independent interstate truckers, can deduct 80 percent rather than 50 percent of meal costs away from home.
2. No deduction for your in-town lunch.
If you eat out rather than brown bag it for lunch, the cost is on you. It’s a nondeductible personal expense.
This unfavorable result doesn’t change even if you’re across town and are forced to eat out because of business. As long as you aren’t “away from home” (in tax parlance this means out of town), your meal costs when eating alone are not deductible in any amount. If you are out of town, your meal costs -- eating alone or with others on business -- are subject to the percentage limitation discussed earlier.
3. Records are required.
If the meal is deductible, you need certain records to back up your claims. Technically, no deduction can be claimed without these records, although there are some limited exceptions. The IRS looks closely at deductions for meal costs because of the potential for abuse and, if your return is questioned, will ask to see required records:
- A record stating when, where, and why you had the meal. For example, the record could indicate that on November 25, 2013, you had lunch with Ms. Davis, a customer, and you discussed a new project that you’re working on for Ms. Davis.
- Receipts for expenses. Exception: You don’t have to retain receipts for a meal costing less than $75.
There are a number of apps for your smartphone that assist you with recordkeeping. You can input the date, location, etc. and take a photo or scan the receipt, making recordkeeping easier.
4. Standard meal allowance rates can ease recordkeeping.
If you have difficulty keeping records and receipts for meals when out of town on business, you can deduct a standard meal allowance. It may be less than your actual meal costs, but you won’t need receipts. If you have employees who travel on business, you may want to use the standard rate to reimburse them for their meal costs out of town.
For 2013, the standard meal allowance usually is $46 per day within the continental U.S. It’s higher in New York City, San Francisco and other high-cost locations, including some resort areas. The U.S. General Services Administration publishes the daily standard rates by state. Independent truckers and others in the transportation industry have a special daily meal rate of $59 per day within the continental U.S.
Caution: Using this rate does not relieve you of the responsibility to keep a record of the time, place and business purpose of the trip.
5. Holiday parties are 100 percent deductible.
If you hold a party for your staff -- in your facility or a restaurant -- you can deduct all of the cost in this instance. As long as the party is for the benefit of employees and is not limited to the top brass, you can write off 100 percent of your costs.
Be sure to discuss your business practices with respect to tracking and reporting meal costs with your tax advisor to make sure you’re in compliance with tax rules.