When you're a small business owner, pretty much any meal is a tax-deductible business meal, right? Not necessarily.
The IRS has very specific rules for what is, and what isn't, considered a business meal for tax purposes. And unfortunately for many small business owners, eating lunch at your desk will most likely not be considered a tax-deductible business meal.
So what are the rules for when a meal can also be a write-off?
When It's a Travel Expense
There are generally only two ways that the cost of a meal can qualify as a tax deductible expense. The first is if your meal expense was incurred while traveling away from your home on business.
However, it's worth noting that your tax "home" is not necessarily your real home. For example, if you live in a different city than where you work, you can't claim your meals while at work as travel expenses; for the deduction, your tax "home" is considered to be the city where your main place of business or work is located, regardless of where you live.
Travel expenses are also only deductible when you are away from home for "a period substantially longer than an ordinary day's work and you need to get sleep or rest to meet the demands of your work while away."
This means that if your job requires you to travel to other areas during the day as part of your normal daily activity before returning home, then meals purchased during this daily travel would not likely be deductible as travel expenses.
When It's a Business Entertainment Expense
The second (and most commonly misunderstood) way of deducting meal expenses is the business entertainment expense deduction. Here's what you need to know:
- Meals are only deductible as an entertainment expense when provided to a customer or client.
- In general, only 50% of the cost of the business meal can be deducted; other rules limit "lavish or extravagant" meals and other expense deductions.
- Business entertainment meals must either be directly related to your business (meaning the main purpose of the meal was business, you engaged in business during the meal, or you had more than a general expectation of getting a business benefit from the meal), or associated with the active conduct of your business and taking place directly before or after business discussions.
In simpler terms: Meeting your friend for lunch on your lunch break isn't a business lunch just because you talked about what you did at work that day. The meal must have more than just a tangential or trivial relation to your job, or it might be disallowed as a deduction.
To learn more about how tax laws may affect your business' bottom line, check out our section on Business Taxes.
- Need legal advice on how your small business should operate? Consult with an experienced business attorney about your options.