You’re not imagining it – these laws seem to change all the time.
In 2017, a piece of legislation making major changes to the tax code went through. Many things were affected, including the kind of tax deductions you’re allowed to take on business-related meals and entertainment expenses. And then the pandemic hit, and all the rules changed again. And then again this year. And they’ll change again at the end of 2025.
If you’re having trouble keeping up, don’t worry. Here’s how meals and entertainment deductions work right now, and what changes you can expect to come in the near future.
|What is a meals and entertainment deduction?|
|How it works right now|
|Come with receipts|
- Meals and entertainment expenses are a common type of tax deduction for business owners
- Changes in the rules are frequent, especially recently
- Currently, most business meals are 50% deductible and most entertainment expenses are not deductible at all
- Company parties are still fully deductible
- Meals provided to an employee in a cafeteria – currently 50% deductible – will no longer be deductible after 2025
What is a meals and entertainment deduction?
A tax deduction, colloquially known as a write off, is an expense or other sum that you’re allowed to subtract from your taxable income, thus reducing the amount you owe in taxes.
From lunch with a client to a holiday party for your employees, meals and entertainment are a classic cost of doing business. Luckily, those expenses often count as a write off. If, in the course of doing business, you or an employee pays for food or drink, that’s a meals and entertainment expense.
According to the IRS, meals and entertainment expenses are deductible as long as they are:
- Commonly accepted in your industry
- Helpful for your business
- “Not lavish” (they are not specific about this)
But the rules around meals and entertainment expenses have changed quite a few times over the past few years, and it’s worth taking a look at recent updates.
Two major legislative acts in the past decade have made sweeping changes to the rules around meals and entertainment expenses: the Tax Cuts and Jobs Act of 2017 (the TCJA) and the Taxpayer Certainty and Disaster Relief Act of 2020.
Tax Cuts and Jobs Act of 2017 (TCJA)
- No longer allowed deduction of entertainment expenses, but could deduct the cost of food at an event
- Allowed 50% deduction of the cost of meals provided to employees in a company cafeteria
- Allowed 100% deduction of holiday parties, snacks given to workers, and occasional meals provided to employees
Taxpayer Certainty and Disaster Relief Act of 2020
- Allowed 100% deduction of business-related restaurant meals during all of 2021 and 2022
- If there’s no owner or employee present, or the meal is “lavish,” allowed only 50% deduction
- Allowed 50% deduction for food from a vending machine or convenience store
How it works right now
As mentioned above, business meals were 100% deductible through 2021 and 2022 in an attempt to help restaurants make it through the COVID-19 pandemic. This is no longer the case.
As of 2023, business meals are now 50% deductible, including meals for employees that are traveling or working late. And client entertainment expenses – golf games, concert tickets, that kind of thing – are no longer deductible at all.
One major exception: company parties. So don’t worry, you can still write off this year’s wild Tax Day party (you all celebrate Tax Day too, right?).
|👩🏫 Note: If it’s a consistent thing, like a daily lunch for employees, that’s a fringe benefit, and it should be reported on employee W-2s as compensation. It’s still a deductible expense for the business owner, however.|
It’s impossible to say what Congress might do with meals and entertainment expenses in years to come, but there is one change coming that we already know about.
Meals provided to employees in a cafeteria will no longer be deductible – at all! – after the end of 2025.
Come with receipts
If you want to take full advantage of your meals and entertainment deductions, you’ll need to provide proper documentation to the IRS.
Retain receipts (or bank or credit card statements) for any expenses claimed above $75 in case of an audit. A calendar event or something similar demonstrating it was a business-related meal wouldn’t hurt, either.
For expenses below $75, no receipts are necessary, but you should still make a note of what the expense was for. In the event of an audit, you want everything to line up how it should.
The bottom line
Meals and entertainment are a time-honored part of business and that means they show up on your tax returns. The rules aren’t complicated, but they change frequently, so stay tuned if you want to keep up. And make sure you keep proper documentation! You want to be able to prove the big expenses are business-related if the IRS comes knocking.
Too busy to keep track of every little change Congress or the IRS makes to the tax code? You’ve got someone for that – us! Schedule a call with DiMercurio Advisors and find out how much easier we can make your tax preparation.