Keeping Records For Your Business Meals
Contrary to popular belief, you donât have to hoard receipts for your restaurant visits in order to claim the business meal tax deduction. For the IRS, bank and credit card statements are good enough.
Just in case youâre audited, you should also have digital breadcrumbs proving your meals were actual business expenses â a calendar event, an email thread, some notes from your discussion.
Justin W. Jones, EA, JD
Justin is an IRS Enrolled Agent, allowing him to represent taxpayers before the IRS. He loves helping freelancers and small business owners save on taxes. He is also an attorney and works part-time with the Keeper Tax team.
What Counts As A Business Meal
The 2017 Tax Cuts and Jobs Act has left some folks confused about the rules of deducting business meals. The truth is, there are no new restrictions on business meals.
What got cut was client entertainment expenses â think concert tickets, or a round of golf. Meals are still tax-deductible.
Now that we’ve gotten that out of the way, let’s talk about how to take that deduction. The IRS guidance on business meals notes that âthe food and beverages” must be “provided to a current or potential business customer, client, consultant, or similar business contact.â
There’s some ambiguity in the phrase âsimilar business contactâ. So we’ll breaking down what counts â and what doesn’t.
Medical Education Expense Deductions
IRS Publication 502 provides that You can include in medical expenses amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of yourself, your spouse, or your dependent.
The costs of the medical conference must be primarily for and necessary to the medical care of you, your spouse, or your dependent. The majority of the time spent at the conference must be spent attending sessions on medical information However, you may not deduct the costs for meals and lodging while attending the medical conference.
For the final determination for what is tax deductible, refer to IRS ruling 2000-24 and IRS Publication 502.
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Business Gifts Are Subject To Limits
Small business owners often give gifts to clients, customers and, even employees, in the course of their business, particularly around the holidays. Although you can deduct the cost of certain gifts as a business expense, there are substantial limitations on what you can deduct.
If an item is excluded from gross income under any other provision, then the rules regarding business gifts do not apply. For example, scholarships are excluded from income under a specific tax law provision therefore, they are not considered gifts. Similarly, most “gifts” to an employee will be treated as taxable compensation for the employee, which is deductible for your business under the normal rules for employees’ pay.
Meal Expenses In Your Tax Home
Self-employed filers can deduct an expense if it is necessary for business. An ordinary meal taken during your lunch break is not deductible unless you’re traveling and cannot eat the meal within a reasonable distance of your tax home. The IRS defines your tax home as the city or general area where your business is located, regardless of where you maintain your personal residence.
For example, say you live with your family in New Jersey but work in Manhattan, where you stay in a hotel during the week and eat in restaurants. Since Manhattan is your tax home, your meals and lodging are not deductible. When you return home to New Jersey on the weekends, your meals are not deductible because they are a personal expense, not a business expense.
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New Tax Laws Make Snacks Less Tax Deductible
Many employers were concerned that snack taxes would become an issue as a result of the new tax laws that went into effect in 2018. Snacks can still be taxed as long as a few conditions are met. Employers can still deduct 50% of snack costs from their taxes as of 2025, but the tax break will end completely in 2025. In 2021, and 2022, businesses can deduct the entire cost of food and beverages purchased from restaurants. Even though snacks are still tax deductible, the new tax law may make it more difficult for businesses to claim the deduction. For the years 2021 and 2022, food expenses typically range from 50% of the meals cost to 100%, which is higher than the previous limit of 100%. Expenses such as free snacks provided at a car dealership or free food and music provided at a public event open to the public are also now considered business expenses.
Business Meal Deduction Requirements
If youre a sole proprietor, you can deduct ordinary and necessary business meals and entertainment expenses. However, these expenses must be directly related to or associated with your business. If youre an employee, you can deduct these only to the extent your employer doesnt reimburse you.
Entertainment includes an activity that provides:
- Recreation, including meals you bought your customer or client
To meet the directly-related requirement, you must show all of these:
- The main purpose of the entertainment was the conduct of business.
- You engaged in business during the entertainment period.
- You expected to get income or some other business benefit.
Your expense might not meet the directly-related requirement. If so, you might be able to deduct a meal or entertainment expense if you can meet the associated test. This test requires both of these to be true:
- The expense is associated with the active conduct of a trade or business. So, the expense must have a clear business purpose, like:
- Getting new business
- Encouraging the continuation of an existing business relationship
The expenses cant be lavish or extravagant. Your deduction is usually limited to 50% of the expenses. You can fully deduct the cost of business gifts up to a maximum of $25 per client per year if theyre:
- Ordinary and necessary to your business
- Given to current or prospective clients
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How Do You Get The Biggest Tax Refund
Maximize your tax refund in 2021 with these strategies:
Maximize your tax refund in 2021 with these strategies:
What Are Tax Deductions
Tax deductions are expenses you can legally deduct from your taxable income, thereby lowering your taxable income and, consequently, your tax liability. These deductions are designed to encourage certain activities, including investing in a trade or contributing towards a retirement account.
The expenses usually occur within the tax year, and to write them off, you subtract them from your gross income. Doing so also allows you to figure out the exact amount of tax you owe.
For instance, if you operate a small business, the law allows you to deduct the costs you incur to operate your business profitably. The Internal Revenue Service doesnt exactly provide a list of tax deductions you can write off.
However, the tax principle in Code Section 62 indicates that any expense you incur while producing an income constitutes a valid write-off.
This essentially means that with the proper business purpose, you could convert even personal expenses to business expenses.
For experienced small business owners, its relatively easy to identify expenses with a legitimate business purpose. Indeed, most of them almost always consider an items tax purpose before purchasing it.
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How To Calculate The Home Office Deduction
You have two choices for calculating your home office deductionthe standard method or the simplified optionand you dont have to use the same method every year. The standard method requires you to calculate your actual home office expenses and keep detailed records in the event of an audit.
The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than 300 square feet, and you cannot deduct depreciation or home-related itemized deductions.
If youre pressed for time or cant pull together good records of your deductible home office expenses, the simplified option is a clear choice. However, because the simplified option is calculated as $5 per square foot, with a maximum of 300 square feet, the most youll be able to deduct is $1,500.
If you want to maximize your home office deduction, youll want to calculate the deduction using both the regular and simplified methods to determine which will give you the greater benefit. If you choose the regular method, calculate the deduction using IRS Form 8829, Expenses for Business Use of Your Home.
What Is The Standard Deduction
The standard deduction is an automatic deduction from your taxable income that you can receive without any itemizing.
Before deciding to claim the standard deduction, its a good idea to compare your standard deduction amount with your total itemized deductions.
For the 2022 tax year , the standard deduction amounts are: :
- $12,950 for single and married filing separate taxpayers
- $19,400 for head of household taxpayers
- $25,900 for married taxpayers filing jointly or qualifying widows
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Meal Entertainment Expenses Must Pass Certain Tests
Your expenses for meals and entertainment must be closely related to your business in order to be deductible.
In the IRS’s view, your expenses may qualify as “closely related,” if they meet at least one of the following two tests:
- the directly related test
- the associated-with test
Even if the expenses are considered related to your business, the sky is not the limit. You can’t deduct meal and entertainment expenses to the extent that they are lavish or extravagant. The expenses must be reasonable considering the facts and circumstances.
Mode Of Donation Eligible For Deduction Under Section 80g:
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Dont Forget Vehicle Expenses
If you volunteer for a charitable organization and have unreimbursed car expenses, you can claim them as a charitable gift if you have maintained excellent bookkeeping records. The miles that you drive in the year for the charity should be logged in a mileage log, including the date of each trip, the purpose of the trip, and the total miles driven. You are allowed to claim either actual expenses or a mileage allowance of 14 cents per mile. The latter is much easier to track and report. You must also obtain written confirmation from the charity for the volunteer driving.
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New 100 Percent Meal Deduction
Since 1986, lawmakers have limited business meal deductions: first to 80 percent, and then to 50 percent .
But on December 27, 2020, in an effort to help the restaurant industry due to the COVID-19 pandemic, lawmakers enacted a new, temporary 100 percent business meal deduction for calendar years 2021 and 2022.
To qualify for the 100 percent deduction, you need a restaurant to provide you with the food or beverages.
The law requires only that the restaurant provide the food and beverages. You dont have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal thats delivered by Uber Eats or Grubhub. In other words, you can dine in the restaurant, order takeout, or use delivery.
Key Point: You need a qualifying business meal for the 100 percent deduction.
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What Can You Deduct
- You may deduct the cost of gluten-free food that is in excess of the cost of the gluten containing food that you are replacing. For example, if a loaf of gluten-free bread costs $5.00 and a comparable loaf of gluten containing bread costs $2.50, you may include in your medical expenses the excess cost of $2.50 for each loaf of bread you purchase.
- The full cost of special items needed for a GF diet may be deducted. An example is the cost of xanthan gum used in gluten-free home baked items, which is never used in a gluten containing recipe.
- If you make a special trip to a store to purchase GF foods, the cost of your transportation to and from the store is deductible. For 2021, you may deduct 16 cents per mile traveled. You may also include tolls and parking fees.
- The full cost of postage or other delivery expenses for GF foods made by mail order are deductible.
What If I Don’t Have The Documents To Prove A Meal Expense
You may need to give an oral or written statement with specific information in addition to other supporting evidence if you don’t have complete records. You may also be able to get acceptable proof by sampling, with records for part of the year used to prove similar situations for other parts of the year. For example, you might not have to show every receipt for the whole year if you take a specific client to lunch every month. You may be able to prove a deduction by reconstructing your records or expenses if your records were lost or damaged in circumstances beyond your control, such as in a disaster.
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Can I Write Off My Lunch If I Am Self
The Tax Cuts and Jobs Act of 2017 was enacted, in part, to simplify the tax filing process. Reforms to rules on itemized deductions meant that some deductions, such as those allowed for business meals and entertainment, were amended or abolished. As a self-employed individual, it’s important to understanding the costs that are still deductible from your taxable gross income. You may be able to lower your tax bill and keep more money in your pocket.
What Are Disallowed Business Expenses
If someone claims a deduction they dont qualify for, the IRS penalizes them for these disallowed business expense deductions. This penalty occurs when business owners use write-offs to pay substantially less income tax than they should have. In general, the IRS defines substantially less as the equivalent of a difference of 10% of what a business owner owes, or $5,000depending on which is higher.
Not only will the IRS audit you for disallowed deductions, but theyll also charge a fine.
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Qualifying Organizations For Charitable Tax Deductions
Donations are eligible for tax write-offs only if you make them to qualified organizations. An organization has to have received the 501 designation from the IRS for it to qualify as a charitable organization in terms of deduction donations for tax purposes, said accountant Eric Nisall, founder of AccountLancer, which provides accounting, tax and consulting services for freelancers.That means your neighbors kids Little League team selling raffle tickets isnt a tax write-off unless the team holds that certification.
Its a good idea to check first with the IRS Tax Exempt Organizations Search Tool, but generally, charitable gifts to the following types of tax-exempt organizations are tax-deductible donations:
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state, and local governments, if your contribution is only for public purposes, such as a gift to reduce the public debt or maintain a public park
- Nonprofit schools and hospitals
- The Salvation Army, American National Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys & Girls Clubs of America and others
- War veterans groups
- A nonprofit volunteer fire company
- Expenses you paid for a student living with you who is sponsored by a qualified organization
- Out-of-pocket expenses for serving as a volunteer for a qualified organization
What Can Be Deducted
There are two categories of deductions that you can take, operating expenses and vehicle expenses. Vehicle expenses are those related to driving your car, including mileage, parking and tolls. Operating expenses are all other expenses, including Uber and Lyft fees and commissions, snacks for passengers, and cost of cell phone plans.
Tax deductions must be expenses made purely for business reasons. If an expense also benefits you personally, only the portion attributed to your business is deductible. For example, you may have a cell phone that you use for driving about 25 percent of the time. In that case, you can deduct 25 percent of the phone bill as a tax deduction.
There are two ways to deduct mileage. That will affect which expenses you can include.
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