Food, Drinks + Fun in Your Business
Have you been wondering what’s deductible and what isn’t when it comes to meals (food + drinks) and entertainment (fun) in your business? Maybe you heard you get a partial deduction, but you’re not quite sure what that means or what it’s applied to. It doesn’t help that there have been major changes by the IRS over the last five years either.
Well, grab your favorite drink, and let’s see if we can bring some clarity to this confusing topic!
First, let’s talk about Food + Drinks
Local meals with others
In order for food or drinks to be considered a business expense, you or an employee must be consuming them with either a co-owner, employee, client, vendor or prospect (or any combination) and there needs to be a business purpose to the meal.
Examples of this could be meeting with a current or potential client to discuss business opportunities, a performance review lunch with an employee, or a lunch and learn business meal with your team.
One question that often comes up is if you need to pay for everything. Nope! You can buy your own meal or coffee, and the person you’re meeting with can buy their own. You get a deduction for what you paid for, as long as business was discussed!
For tax years 2021 and 2022, food and drinks purchased at restaurants and coffee shops that otherwise qualify as a business expense are 100% deductible on your business tax return!
For food or drinks that are purchased elsewhere (from a grocery store or gas station, for example) are still limited to the 50% deduction. As of now, food or drinks purchased 2023 and beyond will qualify for a 50% deduction again.
This 100% restaurant deduction was put into place to support restaurants after the COVID lockdowns.
Travel meals
You’re considered traveling “away from home” if you’re
somewhere outside of the general area where your work is located,
for longer than a normal work day,
AND you need to sleep to meet the demands of your work.
If those are true, then you’re able to deduct meals you consume while you’re traveling for business.
This could be meals on your own or with others. Whether it is at a restaurant or not will determine whether it’s a 50% or 100% deduction.
Meals, drinks + snacks for employees
Meals that are provided to employees so they can continue working are considered “convenience meals.” These meals are generally 50% deducible, unless they are purchased from a restaurant in 2021 or 2022.
If you provide drinks and snacks to your employees on site, these are considered de minimus fringe benefits to your employees and they are only 50% deductible.
These purchases are likely from grocery or retail stores, and could be lumped together with other fully deductible office expenses. Therefore, they should be either purchased on a separate receipt for easy categorization, or you’ll want to make sure to separate these items out when you record your transaction.
Drinks + snacks for clients
If you are providing free drinks or snacks to the public at your location, these are 100% deductible. Examples of this would be canned drinks, coffee, or cookies that are available for people who walk in to your office or salon space at no charge.
Another example of this would be if you were to have an open house or event for your business, you could take a 100% deduction for the food or drinks offered at this event.
Celebratory Meals for all employees
If you are throwing a holiday party or company picnic for all of your employees, the food and drinks provided at this event would also qualify for 100% deduction.
The rule here is that these must be infrequent or limited events. You can’t have a company picnic every month – bummer! Think of this as your “annual” party.
Research + Development meals
If you’re in the business of making meals for clients or customers, you may do research on other meals that are made in order to improve your craft or offerings. These specific meals are subject to 100% deduction.
Shift meals for employees
While we’re on the topic of businesses that make meals for customers… If you have an employee who eats a meal at your restaurant during one of their breaks, this could qualify for a 100% deduction.
The requirements here would be that
they would need to be consuming food or drinks that are prepared by your restaurant,
you purchased these ingredients with the intent of providing them to your paying customers, and
they are consumed at your location.
Purchasing a meal from a different restaurant and eating it at your location would not qualify as a “shift meal.”
Daily coffees or lunch
Going to your favorite coffee shop to start the day, or frequenting your local lunch restaurant likely won’t qualify for any business deduction.
Even if your team goes out to lunch everyday and “discusses business,” it may be are hard sell that these are all business related. Employees have the right to time off for lunch when they’re not “on the clock.” So it’s usually unlikely that everyday they would need to work during lunch and have the meal deductible.
And as we discussed above, getting a meal or coffee solo doesn’t qualify as a business deduction since you’re not with someone else discussing business.
With all of these different categories, it is important for you to use discretion as to which category your food and drink falls under. At the end of the day, you will be responsible for proving to the IRS why you chose the category you did. And it’s up to the IRS to determine whether you’re allowed to take the deduction or not.
On your financial statements, you would want to make sure to separate out each of the different meal categories that you have. This would ensure that you have the proper deduction when it comes time to file your taxes. It’s always 100% easier to classify your meals into the correct buckets when you make the purchase than months later when you’re preparing your tax return. Of course, you would have all of your receipts to look back on though, right?
Now let’s get into the fun!
That title is probably a bit misleading because most entertainment is no longer deductible in your business – And that is definitely not fun.
Sporting events + activities with clients or vendors
As of 2018, entertainment no longer qualifies as a business deduction. That doesn’t mean that you can’t pay for entertainment in your business. It just means you don’t get a write-off on your taxes for it.
These activities include attending sporting events or participating in recreation or amusement activities. There is no deduction for taking a client or vendor out to a round of mini golf, to a show at the local theatre, or hosting a party for your best clients at an amusement park.
There is also no deduction for the travel to and from these activities, or the parking at the venue.
One caveat here is that food or drinks purchased during these activities can qualify for a deduction as long as they are separately stated on the receipt or on a separate receipt all together. They must also be for the normal price – not for a discounted price due to an event package rate.
Charity events as a sponsor
Sponsoring an event as your business is still a deductible expense. The requirements here would be that as a sponsor, your business is advertised in some sort of way, either in a brochure, on a website or banner at the event.
This deduction would classify as Advertising instead of Entertainment. Note that it also doesn’t fall under “charitable contributions.”
Team building events
Here’s the good news, if you host an event for your team, you may be able to take these expenses as full deduction.
As long as you’re inviting your whole team and not restricting it to a couple employees, and it is for the benefit of your employees, the “recreational, social or similar activity” would likely be 100% deductible.
Using the examples given above, if you instead had an employee summer event where you went mini golfing, or went to an amusement park, you could deduct the cost of admission to this event, travel, parking, and any food and drink purchased while at the event.
With the current season of life where so many of us are working remotely from our team, our only connection points are over email, chat or video meetings – having an opportunity to get together in person and have some FUN sounds like a great thing to me!
We tried to list out each of the different scenarios with which our clients have come into contact. If we missed something, or if you have further questions on your particular situation, please contact us and we’d be happy to discuss it with you!
No assurance is given that the information is comprehensive in its coverage or that it’s suitable in dealing with each individual’s particular situation. Kayla Prusinski does not hold a Certified Public Accountant (CPA) or similar license. This blog article is to provide general information only and does not constitute tax or legal advice, and cannot be used or substituted for tax or legal advice. Savvy Bird Consulting, LLC is not responsible for the implementation or outcomes this material may have.