I do tax, insurance and investment advice primarily in Western PA but will travel if necessary. I enjoy using my knowledge of the complex tax code to help everyday people.
Of all the tax deductions self-employed business professionals like to take, none are more successfully challenged by the IRS and denied quite like meals, travel, and vehicle deductions. This is primarily because of lack of understanding of what constitutes an allowable deduction, and what substantiation (i.e. relevant documents) are required.
While business meals, business travel, and business use of a vehicle are all important and worthy of their own discussion, today we are only going to focus on the common business meal deduction a typical salesperson like a real estate pro would claim. No per diems or specialty meal deductions. While the discussion would also, in many cases, carry over to business travel, and business use of a vehicle deductions, those deductions have many other "tentacles" which are beyond the scope of today's discussion.
You are currently able to deduct 50% of your eligible business meals. Right after the COVID pandemic, the IRS allowed a 100% deduction for business meals that took place in restaurants in order to get the restaurant industry back up and running after their yearlong (or more) shut down. The 100% deduction is now over, and the original 50% deduction is now back in effect.
The following list summarizes what substantiation needs to be included in order to have a meal deduction stand up if questioned:
- the amount paid for each meal;
- the date of the meal;
- the name and address of the dining establishment;
- the business purpose of the meal, including the nature of any business discussions; and
- the business relationship of the person entertained by the taxpayer
Now, the first three items are usually a no-brainer, because they are usually printed on the top of the receipt. The bottom two items are usually what is left out IF the receipt is kept (and it definitely should be).
Well how about the bank or credit card statement if a debit or credit card was used? Isn't that enough? In and of itself, nope. It will likely get denied if subjected to an audit, which there will likely be more of now that we have a fully funded IRS again. The record must be "contemporaneous" meaning that all relevant facts are recorded at the time the business meal took place. Going back at the end of the year, or worse, when you are sitting with your tax preparer when he/she is gathering and/or preparing your return would likely result in a denial of the expense.
Get the receipt, write on the receipt the business purpose of the meal, and who was present and either scan it to the folder where you keep your business statements if you electronically download them, or create a business receipt folder and scan them into your system (being that we are in the third decade of the 21st century, if you do not have a scanner, or a three-in-one scanner, copier, fax, how are you able to conduct business in the Information Age?) Some business credit cards, (I use an American Express Business Card) will allow you to upload your scan and keep receipt in your records on their system.
What if I'm running late on the way home and grab a meal at the local tavern because I've been working all day? Hey, bon appetit, but it will not count as a business meal under audit if you are in the local metro area where you live and conduct the majority of your business.
Qualified travel that takes you out of your metro area is able to be deducted at 50% and DOES NOT require another party with whom you are conducting business in order to be deductible.
As alluded to in the first paragraph, the meal deductions, aside from qualified travel, is for business owners and self-employed professionals that are including a meal in the course of a substantial business discussion. If you are an employee, you CANNOT take a business meal deduction for federal tax purposes (though some states still allow it.) My recommendation if you are an employee is to encourage your employer to set up an ACCOUNTABLE PLAN, turn in your meal receipt to your manager or HR person, get reimbursed, and let the company take the meal deduction (they can, you can't). The Tax Cuts and Jobs Act, passed in December 2017 eliminated meals as an allowable employee deduction. This legislation will end on December 31, 2025, and it remains to be seen if employee business expenses will be allowed again on Forms 2106 and Schedule A of the Form 1040.
Hopefully you found this brief article helpful.
Halas Consulting
Phone: 412-685-4285
Email: chalas@vennwealth.com
www.halasconsulting.com
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