Business meal and entertainment deduction rules

Wouldn’t it be grand to deduct business dinners and entertainment freely? Luckily, you can deduct certain ordinary and necessary business meals—but there are rules to consider. Read on as we highlight what you can and can’t deduct.

Meals

Let’s start by dispelling the myths and truths of deducting business meals.

What can you deduct?

You can deduct a meal expense if:

1. The expense is ordinary and necessary. (An expense is ordinary if it’s normal or common within your fiend or business community. And an expense is necessary if it’s helpful to your business.)
2. The business owner or an employee of the business is present.
3. The expense is not lavish or excessive.
4. The meal was expensed with a current or potential business customer, client, consultant, or similar business contact.
5. The expense is associated with the active conduct of a trade or business. So, the expense must have a clear business purpose, like:
   • Getting new business
   • Encouraging the continuation of an existing business relationship
   • Discussing a substantial amount of business before, during, or after the meal or entertainment

How much can you deduct?

Generally, you can deduct only 50% of qualifying business-related meal expenses. The 50% limit applies to employees, employers, and the self-employed or their clients.

Previously, between December 31, 2020, and January 1, 2023, 100% of business meal expenses for food or beverages from a restaurant could be deducted.

Business meals not subject to the 50% limit

Certain business meal expenses are not subject to the 50% limit if the expense meets one of the following exceptions:

• You treat goods, services, and facilities as expenses as compensation and wages to an employee.
• You reimburse employees under an accountable plan.
• The expense is for recreational, social, or similar activities such as a company party or get-together.
• You provide a meal to the general public to advertise or promote goodwill in the community.
• You sell meals, goods, and services, or use of facilities, to the public.

The 50% limit also applies to business meal expenses while:

• Traveling away from home (whether eating solo or in a group), or
• Attending a business convention, reception, meeting, or luncheon at a club.

You can fully deduct business gifts. The maximum amount is $25 per client per year. The expense must be:

• Ordinary and necessary to your business
• Given to current or prospective clients

Entertainment

Entertainment includes an activity that provides amusement, entertainment, or recreation for business purposes. The rules around deducting business expenses over the years have changed, so pay attention as you read.

What can you deduct?

While you can’t deduct the cost of entertainment, you may be able to deduct 50% of the meal costs as long as the food and beverage purchase occurs separately from the entertainment, or the cost of the food and beverages is separate from the cost of the entertainment on one or more bills/invoices/receipts.

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deduction for most entertainment expenses. Now, entertainment, amusement, or recreation activities are mostly not deductible.

Previously, tickets to shows or sporting events you give to clients to promote business were deductible. For example, if you accompanied your client to an event, you could deduct the cost of the tickets as an entertainment expense. If you don’t accompany your client, you can deduct the cost as an entertainment expense or as a gift.

You can’t deduct expenses for club dues, like those you pay to:

• Country clubs
• Social clubs
• Athletic clubs
• Airline clubs
• Food clubs

How much can you deduct?

Again, you can’t deduct entertainment activities currently. But, tax law frequently changes so stay on the lookout for changes or speak to a Tax pro.

Recordkeeping best practices

As with any deduction, good recordkeeping is essential. Your expense records should show:

• The primary purpose of the activity was to conduct business,
• That you engaged in business during the entertainment period,
• And that you expected to get income or some other business benefits.

In addition, follow these recordkeeping best practices:

1. Keep one or more of the following expense records:
2. Receipts
3. Canceled checks
4. Bills
5. Track the cost of each meal or entertainment expense, date the expense took place, and the name, location, and type of meal or entertainment.
6. List the reason for the expense:
7. How the business benefit from the expense,
8. A summary of the discussion that took place,
9. And name(s) and occupations(s) of the individuals entertained or dined with.

More help with entertainment and meal expense deductions

Understanding meal and entertainment expense deductions can be confusing, especially with frequently changing tax rules. Whether you choose to file with a Tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.