Taking a client, a potential client or an industry expert out for a meal can be a really effective way to build your business. A good meal at a comfortable restaurant is usually a pleasant experience and can put people in a good mood to talk. Some of the most fruitful partnerships and most beneficial business deals have been made in conversations over dinner.
What not every self-employed individual, freelancer or entrepreneur might know is that as long as a dinner has a legitimate business purpose, you can write the cost of it off your taxes. If you're just starting to make business meals part of your strategy, or even if you're already regularly using meals to drum up business or thank existing clients, you might be starting to ask, "are meals tax deductible?" And you'll want to be aware of what exactly you can deduct and what you can't.
This deductible expense is any food or drink at a food and beverage establishment that fulfills the IRS criteria for a business meal. A meal can qualify as a deductible business meal in the eyes of the government if it fulfills all of the following criteria:
Meals you have for personal reasons are, as you might imagine, not allowed to be written off your taxes. That includes while you're traveling, unless the expense is "primarily" a business trip, according to the IRS.
Entertainment expenses are also no longer deductible. In years past, entertainment expenses such as taking a client to a concert could be deducted, but recent changes in legislation have many people asking "are business meals deductible in 2021?" The answer is yes. It's only the entertainment part that is no longer deductible.
What used to be called the meals and entertainment deduction 2021 is no longer a reality for freelancers or self-employed individuals. The good news is that you can deduct meals in a variety of business-related situations. The business meal deduction 2021 brought new rules that allowed for 100% of a business meal to be written off from taxable income.
For a business meal to be considered tax-deductible, you must be present when the food or drink is consumed. You can't pay for a dinner that a client has at a restaurant when you're not there, and then write that off as a business expense.
The people you have a meal with also need to have a function that's relative to your business. That means the person must be a client or a business partner, or someone who you are trying to woo as a client or business partner. It can also be a consultant or an industry expert who is giving you business advice or professional guidance.
If you're a freelance graphic designer, and you're trying to win the business of a boutique shop in your neighborhood, you might invite the owner to lunch to offer your services. That lunch is entirely tax-deductible. Or maybe you're looking for strategies to grow your business, and you invite the owner of a small design firm, who you know started out like you, to dinner. As long as you're asking them for tips on how to grow your business, you can write the cost of the meal off your taxes.
There is no dollar limit to what you can spend on a business meal, and you can dine at high-end restaurants and still deduct the cost. It just takes a little common sense to stay within the IRS' limits.
If you decide to order a bottle of expensive champagne for you and your business meal partner, as well as the most expensive dish at a top restaurant, the IRS may see this as over-the-top if you are audited, and they won't allow it to be deducted.
In the eyes of the IRS, an "ordinary" expense is something that is commonly understood as relating to your industry. If you're a graphic designer whose clients ask to provide designed and printed materials, you might want to meet a vendor who prints advertising materials. The services that vendor provides are considered "common and accepted" by the IRS, so the meal would be deductible.
The IRS uses the word "necessary" to define any expense that is "helpful and appropriate.” But the meal doesn't necessarily have to be indispensable. If your business lunch is with a potential client, and you are pitching a design to them, it might not be a lunch that you need to have to run your business. But seeking out new clients is easily considered to be helpful and appropriate for your industry and your self-employed business.
After you've made sure a business meal qualifies as a business deduction, the next step is documentation. For your tax return, all you need is a record of the transaction you made at a restaurant. For this, your bank statement will do just fine.
But, in the event of an audit, it's always a good idea to have something written down. Keep a notebook or a doc on your laptop that lists details about the meal:
At the end of the year, you'll also need to decide which method of deducting to use on your taxes, the itemized deduction method or the standard deduction method.
Itemized deductions are tax deductions that you take for the exact amount you paid for something. After you've determined which of the meals you paid for throughout the year qualify as deductible, you can claim them as deductions by itemizing them on your tax return.
To do this, you just list the expenses on your tax return and subtract the amounts from your annual gross income. The lower your gross income, the less there will be to pay taxes on.
If you go the standard deduction route, you can take one big deduction from your taxable income, based on the tax bracket, or income range, you fall under and your filing status.
There are so many expenses that qualify as business expenses for self-employed individuals and freelancers that itemizing deductions is almost always the more beneficial method. You can use a calculator to help figure out which is best for you.
If you decide to go with the itemized expense method, you'll list all your business meal expenses on your Schedule C on line 24b. For small businesses incorporated as S corps, you'll enter this information on Form 1120. Partnerships will add it to Form 1065.
There is no change in 2022 to the rules around business meals from 2021, and as long as you know what qualifies as deductible, you can save significantly when it's time to pay your annual income tax.
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.