For 2023 most business meal expenses are once again 50% deductible under Code Section 274. This is down from the temporary exception for meals purchased from a restaurant as 100% deductible during 2021 and 2022.
OVERVIEW OF ENTERTAIMENT AND MEALS
By definition entertainment expenses, even with a business purpose, that fall into these categories and are not deductible, without an exception:
There are several changes to consider with meals, making it important to track and document all meal expenses. For dining with clients, employees and potential clients and discussing business, these expenses are deductible at 50%. For business meals when traveling outside the normal commute, these expenses remain deductible at 50%.
There are also changes under TCJA with food and beverage purchases for employees at the office. Once deductible at 100%, this expense is now deductible at 50%. Food expense can be written off at 100% for a company party or social event, where more than half of the attendees are employees, not including owners or highly compensated employees. Food that is provided for free at a function for prospective customers, for the purpose of advertising or promoting goodwill, is deductible at 100%.
When meals are associated with entertainment, record keeping becomes critical. All food expenses must be reflected as a separate line item to be deductible. If you take a client to a football game and purchase food, the game tickets cannot be deducted, but if the food is purchased separately, it can be deducted at 50%.
THE IMPORTANCE OF GOOD RECORD KEEPING
With so many expense categories and variances in meals and entertainment, keeping good records becomes very important and can help reduce tax preparation time and fees, lessen the potential for lost deductions and possibly soften a critical eye in the event of an IRS audit.
A best practice for accounting meals and entertainment is to create separate general ledger accounts to categorize each level of deductibility that you incur. These categories might include Meals – 100%; Meals – 50%; or Nondeductible meals and entertainment. A summary of the various types of expenses and their percentage deductions are as follows:
|Expense Category||Deductible Amount|
|Company social events for employees (holiday parties, company picnics, etc.)||100%|
|Meals and entertainment included in employee or nonemployee compensation||100%|
|Reimbursed expenses under an accountable plan||100%|
|Meals and entertainment made available to the public||100%|
|Meals and entertainment sold to customers||100%|
|Client/customer business meals from restaurants||50%|
|Business travel meals from restaurants||50%|
|Business meeting meals from restaurants||50%|
|Meals provided for the convenience of the employer||50%|
|De minimis food and beverages provided in the workplace (e.g., bottled water, coffee, snacks)||50%|
|Employer-operated eating facilities (before 2026)||50%|
|Meals provided for the convenience of the employer (after 2025)||0%|
|Employer-operated eating facilities (after 2025)||0%|
|Nonseparately stated meals/beverages associated with entertainment activities||0%|
|Personal, lavish, or extravagant meals/beverages in relation to the activity||0%|
|Entertainment without an exception||0%|
Your business may have regular activities that could require additional categories to be created. It’s important to work with your accounting team to look at your existing expense categories and to build processes and accounts around these common occurrences.
Once the proper accounts are created, it’s also important to train your staff who will be tracking these expenses to appropriately categorize them. Develop internal processes and common scenarios that are easy to follow and make them accessible to your team.
If you have not already been tracking meals and entertainment this way throughout the year, now is the time to begin working with your employees and accounting partners to prepare for tax season and fully implement this method of tracking for 2023.
For more information on how you can organize your business for tax season, contact Kerkering Barberio at 941-365-4617.
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