Dining and Entertainment Expenses for Small Business Owners

When it comes to tax deductions, meals are one of the most underused yet important expenses small business owners can leverage. After all, a lot of business gets done over a meal, and tracking these expenses is essential. However, there have been significant changes to how dining and entertainment deductions work, especially after the Tax Cuts and Jobs Act (TCJA) went into effect in 2018.

While some meals were once 100% deductible, most dining expenses are now limited to 50%. The IRS argues that everyone needs to eat, regardless of whether they’re conducting business or not, and considers the 50% deduction fair. Though it may seem like a loss, it’s still a valuable deduction if properly tracked.

Here’s how you can ensure you’re maximizing your deductions while keeping up with the latest IRS rules.

1. Business Meals with Clients or Partners

When discussing business with a partner, client, potential client, or vendor, dining expenses are deductible at 50%. This applies to meals at a restaurant, bar tabs, and even tips. Be sure to log all expenses, and if you’re only paying for your portion of the meal (like splitting the check), you’ll only deduct 50% of your share.

Keeping a detailed calendar of meetings and meals, along with saving or scanning receipts, is key to ensuring your accountant can apply the correct deduction.

2. Meals While Traveling for Business

Another commonly missed opportunity is deducting meals when traveling for business. When you’re conducting business outside your normal commute or operating area, your dining expenses can be deducted at 50%.

This is an important savings strategy for frequent travelers, but it’s crucial to track your travel dates and locations carefully.

3. Food Provided at the Workplace

Expenses for food provided in the workplace, like donuts, coffee, or meals during working hours, are also limited to a 50% deduction under the TCJA. Before 2018, these were 100% deductible, but the rules have changed.

4. Food for Events or Presentations

There’s still an exception to the 50% rule when it comes to customer events. Food provided during events like open houses, training workshops, or customer presentations is 100% deductible. If you offer refreshments such as wine and cheese at an event or host a lunch during a workshop, be sure to track these expenses separately so they aren’t mistakenly grouped under regular dining expenses, which are limited to 50%.

5. Special Events for Employees

Certain company events still qualify for a 100% deduction when they involve food. These include:

(a) Holiday parties

(b) Team-building events with food

(c) Employee appreciation events

Keep in mind that the majority of the attendees at these events must be legitimate employees or vendors. Owners and their families are not included for 100% deduction eligibility.

Entertainment Expenses: What Has Changed?

Entertainment used to be a deductible expense, but the 2018 tax reform drastically changed that. In the past, you could deduct 50% of entertainment costs when hosting partners, clients, or employees. Unfortunately, those deductions are no longer available.

Final Thoughts

While the rules for dining and entertainment expenses have tightened, there are still significant deductions available if you know how to take advantage of them. Make sure to keep detailed records of your meals and events, and clearly separate 100% deductible items like customer event food from typical dining expenses. With the right tracking and a knowledgeable accountant, you can still make your meals and gatherings work for you come tax season.