The Self-Employed Guide to Meals and Entertainment Deductions
As a self-employed professional, it’s in your best interest to save money (and get those all-important tax write-offs) at every possible opportunity.
We know some things are regularly written off, such as equipment expenses.
But, regarding meals and entertainment deductions, the rules get more challenging to understand.
So in this post, you’ll get the official ‘411’ on precisely what you can and can’t write off in this rather complicated (but no less critical) category.
Let’s dive in and shrink that tax bill.
The Basics: Meals and Entertainment Deductions
This first section will review some common questions and answers that freelance taxpayers need to know when writing off business expenses.
Of course, as a self-employed professional, it’s in your best interest to get as many tax write-offs and deductions as possible — partly because, thanks to self-employment tax, your tax liability as a self-employed individual is going to be more than that of someone who is employed by someone else.
What Are Meals and Entertainment Deductions?
Let’s start with entertainment.
Rules For Entertainment Deductions
Generally, entertaining clients (for example, taking them to a concert, paying for rounds of golf, etc.) is nondeductible.
This may initially seem confusing, especially considering that entertainment activity expenditures used to be at least partially deductible.
But here’s why it’s different now.
According to the 2018 Tax Cuts and Jobs Act, entertainment deductions (which you used to be able to write off at a rate of 50%) have pretty much been eliminated. In other words, according to the new rules of the TCJA, the IRS won’t allow your small business to write off the price of things like those mentioned above. So, throwing a company-wide party is 100% deductible. You can also deduct 100% of the cost of meals and entertainment included in compensation to employees.
As a self-employed professional, you may not necessarily be able to use the ‘company-wide party’ idea unless you have employees. But it’s important to understand that you can’t “entertain clients” and write those expenses off your taxes.
Rules For Business Meal Deductions
Due to the Consolidated Appropriations Act signed into law in December 2020, the deductibility of meals is different from what it used to be.
Some things can be written off, while others can’t.
One of the most significant changes is that business beverage and food expenses are 100% deductible in 2022 if purchased from a restaurant.
You can also deduct 50% of the cost of snacks or food for the workplace purchased at a grocery store.
Generally speaking, outside of temporary special allowances made by the Consolidated Appropriations Act, meals and beverages purchased for business functions are 50% deductible.
So, as a self-employed professional, if you go to a business meeting at a restaurant and order tacos and a soda, you can write 100% of the total for that expense off on your taxes (make sure to save and itemize your receipts) until the end of 2022.
In 2023, you’ll only be able to deduct 50% of those costs.
Are Personal Meals Tax Deductible?
Here’s the thing about personal meals.
As a self-employed business owner, you don’t get to write off your meals every time you go out to eat just because you’re a business owner (we know, it’s a bummer).
But you can write off 50% of the cost of your meals if those meals are business-related. And you can write off 100% of the price in 2022 as a temporary deduction benefit if a restaurant provides that meal.
What Is Included In Meals And Entertainment Expenses?
Regarding meal expenses, you can write off meals if there is a “valid business purpose” to the feed.
Some examples of business meals that are 100% deductible include:
- meals supplied for business holiday parties
- snacks that are provided at the office
- meals provided on the employer’s business premises to more than half of the employees for the convenience of the employer
- meals made available to the public for promotions
That said, meals related explicitly to business meetings, meals purchased while traveling for business, and meals involving meetings with clients are usually 50% deductible — though this was temporarily increased to 100% deductible in 2022 as long as a restaurant is supplying the meal.
For entertainment expenses, you can’t deduct the cost of entertaining clients. But you can remove some things.
For example, you can deduct 100% of the cost of a team-building activity (like a picnic) for your company, even though that’s technically a form of entertainment.
This is due to a part of the IRS tax code that says “expenses for recreational, social, or similar activities (including facilities) primarily for the benefit of employees” are 100% deductible.
You could also, for example, get a 100% expense deduction on a golf outing for employees and spouses, while you could not get a deduction for entertaining clients at the golf course.
How To Find The Meal And Entertainment Deductions Numbers
While it’s a lot to sort through, you can find everything needed to help you figure out precisely what you can and can’t write off (and for how much) in Publication 535 on the IRS website.
If you’re ever in doubt about precisely what is and isn’t deductible, we encourage you to pour yourself a solid cup of coffee and read through the meals and entertainment portions of the document.
What Are Fringe Benefits, And Why Do They Matter?
Fringe benefits are technically additions to the compensation that companies give their employees. Therefore, depending upon the specifics of the fringe benefits, they may or may not qualify as taxable compensation, and they may or may not count toward gross income for the employee.
Some examples of fringe benefits could include health insurance, life insurance, tuition assistance, etc.
But meal and entertainment perks are sometimes added to this list.
So are they deductible when given as a fringe benefit?
In a word, yes — to the extent that meals and entertainment can usually be deducted.
Whether the business meal expenses are one-off or regular fringe benefits, the cost of food can be deducted just the same.
How Did Congressional Coronavirus Legislation Affect Meals and Entertainment Deductions?
During the Coronavirus pandemic of 2020, Congress passed some specific legislation to help businesses and individuals who were financially affected.
The final regulations that were settled upon were a bit confusing, and some were just temporary measures, but here’s what you need to know.
What Is The Consolidated Appropriations Act?
The Consolidated Appropriations Act passed in 2021, provided several forms of fast and direct economic assistance for not only American workers but also small businesses, families, and several industries.
How Does It Affect Meal And Entertainment Deductions?
The Consolidated Appropriations Act provided help to businesses affected by Covid-19 by giving a temporary lift to food and beverage deduction limitations.
The main difference was this: during 2022, businesses will be able to deduct 100% of the cost of food and beverages (purchased for business purposes) as long as a restaurant provides them.
What Meals and Entertainment Deductions Are Disallowed?
According to the IRS tax deduction laws, you’re usually allowed to deduct meals at the rate of 50% (outside of 2021 and 2022).
With that being said, there are several basic requirements you need to meet for the deduction to be allowed on your tax return.
For example—the business owner or an employee must be present during the meal (a business associate alone does not qualify), and the dinner cannot be “lavish or extravagant.”
If you try to deduct things that don’t follow IRS guidance, those particular items could be subject to disallowance — which means that the IRS can “not allow” that special deduction to count on your taxes.
How To Track Meals and Entertainment Deductions
In the wake of the 2018 Tax Cuts and Jobs Act, it’s now essential that you separate food expenses from entertainment expenses and keep the receipts separate.
Entertainment, as stated above, is only deductible in particular situations—and if it is deductible, it may be deducted at a different rate from food and beverages.
Therefore, keeping careful, separate records is essential to avoid complications from leaving these things together. That way, you can prevent getting specific deductions disallowed when tax time rolls around.
How To Write Off Meals and Entertainment Deductions On Your Taxes
You’ll want to make sure that you keep careful, meticulous records. You need receipts with dates and amounts. They’re proof of qualifying meal and entertainment purchases. Then, claim them as itemized deductions on your taxes.
If you conduct this step correctly, those expenses should get you write-offs on your taxes to lower your taxable income.
Can You Write Off Your Sales Tax?
Yes. The IRS allows you to deduct the sales tax paid on meals and other qualifying deductions.
When it comes to food, even if you’re not sure what the exact sales tax number is, you can use optional state sales tax tables based on each state to figure out the calculations based on your family size and income level.
Can You Write Off Meals and Entertainment Deductions On Your State Income Taxes?
Generally, you can itemize your state tax deductions or take the standard deduction. But every state has slightly different specific laws about this.
For best results, you’ll want to consult your CPA. Together figure out precisely the rules in your state and write off deductions as appropriate.
Can You Write Off Meals and Entertainment Deductions As Travel Expenses?
Business travel expenses are generally 100% deductible. However, due to changes made by the Tax Cuts and Jobs Act, entertainment on that trip cannot be deducted.
Therefore, your company should keep a separate account for entertainment-related expenses.
Once again, during business travel, meals are usually deductible at a rate of 50%, though meals provided by restaurants are still 100% deductible until the end of 2022.
Conclusion – Meals and Entertainment Deductions
Hopefully, this post has helped give you an in-depth overview of how to handle meal and entertainment deductions as a freelancer, small business owner, and gig worker.
Of course, taxes are always a bit confusing — and the tax code surrounding meal and entertainment deductions is no exception.
But it’s still essential to get it right; you deserve every penny you can get. So making sure that you understand the ins and outs is crucial.
Do you need access to finance and legal resources to help you navigate these things? Consider signing up as a member of the Alliance of Gig Workers through Selfgood to access a range of services, discounts, and programs usually unavailable to self-employed individuals.
You can also access healthcare services, discounts on time off, small business support, and more.
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