Well, things have changed in 2018 when it comes to writing off meals and food expenses in your small business…and frankly, that’s for any size business. Large or small, business owners have to reevaluate their budget for the food they were able to deduct in the past.
Dining, meals, food in the office, food while traveling, eating with employees, eating with partners or clients, whatever you call it, there’s one thing in common: Confusing. Yes…most of it is still a write-off, we hope, but what percentage and how to stay out of hot water with the IRS- that’s a whole other question.
First, let’s examine the ‘types’ of meals and I’ll try and ‘set the table’ with 4 main options to consider and what you should be tracking in your books.
Type 1: Dining with a Prospect or Important Client
Obviously, this is the most common meals expense we have all been relying on and utilizing in our businesses for years. Typically deductible at 50%, and we hope that continues to be the case. (IRC Section 274(a) 2018; 274(d) 2018). ** UPDATE ** On October 3, 2018, the IRS Issued Notice 2018-76 and cleared up the confusion…this is directly from the Notice (and it’s actually understandable in laymans terms):
“Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.”
So the end result is that it’s ‘business as usual’ when it comes to writing off meals with clients, potential customers, business partners, employees, etc.. HOWEVER, if you decide to do some ‘entertainment’ with the meal, make sure you pay for the food separately. HOPEFULLY, we’ll see the entertainment expense come back into play in the future (not what the IRS wants, but only if we could wish it so).
Type 2: Dining While Traveling
Good news here- no changes. Meals while traveling outside of a normal commute in your business were deductible by 50% and that continues to be the case. More specifically, these are expenses while traveling for legitimate business meetings. Examples would include education or training conferences, or a Board of Directors retreat, checking on a rental property, a business location, or even going to meet a prospect or vendor. This includes food, tip, and even the bar tab.
Type 3: Meals with Employees, Club Meetings & Food for Employees
Regrettably, this used to be a 100% deduction prior to passage of the TCJA. However, they are now limited to 50%. These are expenses such as:
- Meals to hold a required lunch meeting on the business premises with your employees (not with your business partners or clients).(IRC Section 274(n)(2) 2018; 274(e)(1) 2018).
- Meals to hold a required business meeting with your employees at an offsite location that passes the definition of a business premise (think hotel and not a restaurant)(IRC Section 274(n)(2) 2018; 274(e)(5) 2018).
- Food in the office for employees and your convenience. For example, bagels on Wednesday, donuts on Friday, coffee maker, water cooler, or even a full blown cafeteria.
- Meetings that include a lunch fee, for example at the Chamber of Commerce or a local REIA club. (IRC Section 274(n)(2) 2018; 274(e)(6) 2018).
Type 4: Year-end parties for employees, marketing presentations, and COGS food expenses
Yes, some types of food expenses survived and are still 100% deductible! These are items where food is paid for in a non-entertainment venue for the general public in a marketing presentation or ‘open house’ if I was a Realtor showing a property. Moreover, you can deduct the food and costs for a team building event, or a year-end party exclusively for employees and not the owners of the business, or highly compensated employees. Consider this an experience for your rank and file employees. (IRC Section 274(n)(2) 2018; 274(e)(4) 2018). These would be situations such as:
- Snacks, food or treats at an ‘open house’ to show a home if you are a realtor
- Snacks or food at a promotional event for customers or prospects
- Food costs as a restaurant, store or similar establishment where the food is a ‘cost of goods sold’ as an item for sale
- Food at an event or workshop in which patrons paid to attend and the food was part of the cost to attend
Substantiating your expenses
In light of these more complicated rules and frankly confusion, it’s more critical than ever to track your expenses carefully in order to allocate and deduct them in the proper manner come next spring. Here is an article on travel and meals regarding substantiation and recording procedures.
Bookkeeping is more important than ever
We are highly recommending our clients create bookkeeping categories/expenses in QuickBooks for these 4 types of meal expenses. This way at the end of the year you can better strategize with your accountant, substantiate your expenses, AND make sure you take the proper percentage (%) write-off for the right type of expense.
10 Takeaways and examples:
- You travel to a conference for your profession and pay for food along the way and during the conference. 50% write-off
- You travel to a business conference and while there take out a customer of yours, discuss business and close a deal. 50% write-off.
- You pay for a required employee meeting at the office and discuss business operations. 50% write-off
- You go out to lunch with an employee for their birthday and flip the tab- Should be tracked separately and we expect it to also be a 50% write-off.
- You and your business partner go to lunch to talk important business- 50% write-off.
- You and your board of directors, or board of advisors for your business travel to a location outside of a normal commute for a quarterly or annual meeting in which you take notes and have a business discussion. 50% write-off
- You take a prospect golfing, to a spa, or baseball game, have lunch during or after, talk business and close their future business with your company. No write-off for the activities, but meals paid for separately are 50% write-off
- You own a restaurant or convenience store or farmers market and sell food, products or prepared meals. All food is a 100% deduction as a cost of goods sold.
- You hold an event and charge attendees for a conference, training or experience that includes the meal as part of their registration. 100% write-off
- You hold an open house, event or presentation free to the public, and provide snacks, drinks, and food for the attendees. 100% write-off.
Bottom line, even with these major tax-law changes, dining and or event and office food can add up to be a significant expense on your books. Keep good track of your food expenses and keep several categories in your QuickBooks. It’s not a big deal to do so and it will give you an important opportunity for a discussion at tax-prep time.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.