The deductibility of meals for tax purposes is confusing. The rules regarding meal deductions have changed over the years. This has made it harder to understand what is allowed and what is not. In this article, we will break down the latest rules regarding the deductibility of meals for tax purposes in 2023.
Firstly, it is important to note that the Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes. Prior to the TCJA, businesses were allowed to deduct 50% of meals and entertainment expenses incurred for business purposes. However, the TCJA eliminated the deduction for entertainment expenses, and the rules for deducting meals were tightened.
Current Rules for deductibility of meals for tax purposes
Under the current rules, businesses can generally deduct 50% of the cost of food and beverages that are purchased for business purposes. This includes meals provided to employees or business associates, as well as meals purchased while traveling for business. The food and beverages must be reasonable in cost and not lavish or extravagant.
It is important to note that the 50% limit applies to the actual cost of the food and beverages. It does not include taxes and gratuities. For example, if a business spends $100 on a meal for a client, they can deduct $50 as a business expense. However, if the meal includes $20 in taxes and $10 in gratuity, the deductible amount would be $50.
Additionally, the IRS has provided specific guidance on certain types of meals that are deductible at a higher rate. These include meals provided to employees for the convenience of the employer, such as meals provided on-site or during overtime work. These meals are 100% deductible as long as they are not considered a form of compensation to the employee.
Another exception to the 50% limit is for meals provided at company-wide events, such as holiday parties or picnics. These meals are also 100% deductible as long as all employees are invited and the cost per person does not exceed a certain limit. The limit for 2023 is $75 per person.
Other issues to consider
It is important to keep accurate records of all business meals. This includes the date, location, and purpose of the meal, as well as the names of the individuals who attended. This will help ensure that the deduction is allowed in the event of an audit.
It is also worth noting that meals provided for personal reasons, such as meals with family or friends, are not deductible. Only meals that are directly related to the business are eligible for the deduction.
In addition to the rules for deducting meals, it is also important to understand the rules for substantiating expenses. Under the TCJA, businesses are required to have detailed records of all expenses. This includes receipts or other documentation that shows the amount, date, and business purpose of the expense. This requirement applies to all expenses, not just meals.
In summary, the deductibility of meals for tax purposes in 2023 is subject to certain rules and limitations. Businesses can generally deduct 50% of the cost of food and beverages that are purchased for business purposes, as long as they are reasonable in cost and not lavish or extravagant. There are exceptions to the 50% limit, such as meals provided for the convenience of the employer or at company-wide events. It is important to keep accurate records of all business meals and to understand the rules for substantiating expenses.