Maximizing Deductions for Meals and Beverages
Most business owners re aware of the tax rule that disallows 50% of their otherwise allowable deductions for business meals and beverages. This provision normally applies regardless of the reason for the meal---from taking clients out to dinner to paying for your meals while traveling away from home. What is not nearly as widely known is that there are several exceptions to this 50% disallowance rule. When one of these exceptions applies, you generally get a 100% deduction. Here is a summary of the exceptions.
The Office
The de minimis rule
When meals, snacks or beverages are provided to employees onsite, in the office, factory, or other employer premises, the meals, snacks or beverages are tax-free to the employee and 100
% deductible by the employer, if they are de minimis. It does not matter how the employer is organized for tax purposes, whether sole-proprietorship, corporation, partnership, or limited liability company. Typically, the most common application of this rule involves coffee, soft drinks, juices, donuts, bagels, and similar snacks consumed on the premises.
Note: The IRS issued a private letter ruling (Letter Ruling 200030001) that said that for the expense to be considered de minimis, the accounting for the cost must be “unreasonable or administratively impracticable”.
Employee Parties
Spouses can be included
When meals and beverages are provided at recreational, social, or entertainment gatherings primarily for the benefit of rank and file employees, as opposed to highly compensated employees, the cost is 100% deductible by the employer. Typical examples include company picnics and outings, birthday celebrations, company anniversary celebrations, retirement parties, banquets, and holiday parties such as Thanksgiving and Christmas. Costs for guests are also included. For husband and wife businesses, parties should include at least the other spouse; even better if one or more guests are included, such as important independent contractors and suppliers.
Transportation Costs
Take the Mercedes to lunch too
When a car, taxi, bus, or other means of transportation are used to get to and from the place where meals and beverages are consumed, the cost is 100% deductible. This rule includes the cost of chauffeured vehicles, luxury vehicles, etc.
Meals and Beverages Provided to the Public
Nobody tracks what happens to the leftovers
Expenses incurred for meals made available to the general public are 100% deductible. Examples include free food and beverages at concerts hosted by a shopping mall, free dinners for potential restaurant customers, free hot dogs at a car dealership or hardware store promotion, a free wine and food tasting exhibition sponsored by a liquor dealer, and free hors d’oeuvres furnished by a realtor for a client’s open house. This exception also applies to meals provided to potential customers as part of a sales presentation as long as the potential customers are drawn form the general public rather than being specifically chosen because of who they are (Private Letter Ruling 9414040).
Meals and Beverages Billed to Clients and Customers
Billing customers and clients for meals is not general practice
When services are provided by an independent contractor/service provider, that person or company can deduct 100% of meals and beverages provided as part of a sales, service or goodwill meeting if the cost is billed to the client or customer. The 50% disallowance rule shifts to the client or customer. Otherwise, any nonbilled meals and beverage deductions are limited to 50% of the cost.
Charitable Sporting Events
Golf tournaments are the classic example
When meals and beverages are provided in connection with a qualifying charity sporting event, whether separately or as part of a ticket price, the cost is 100% deductible provided the net proceeds of the event are donated to the designated charity and volunteers do almost all the work in the event. It is OK if concessionaires are paid. An classic example of a qualifying charity sporting event would be a golf tournament with a meal included.
Prizes and Awards
How to deduct the cost of cruises
When meals and beverages are provided in connection with a promotional drawing and/or an award, the cost is 100% deductible provided the value of the drawing or award is included in the income of the employee or client and customer. For example, a company that provides a dinner cruise valued at more than $600 should issue a Form 1099-MISC to the employee or client in order to take a 100% deduction. Otherwise, the 50% disallowance rule applies.
Restaurant Gift Certificates
If the gift certificate(s) are especially high in value, the 50% meals deduction is the better choice.
If gift certificates from restaurants given to employees are less than the $25 limit on the deductible amount of a gift per donee per year, the value is 100% deductible. If the amount is over $25, then the employer may either take the 50% meals deduction or the deduction for the $25 gift amount. However, if the employer accompanies the gift recipient to the restaurant, then the 50% meal disallowance automatically applies.
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