Heads up: this article is only relevant for U.S. businesses.
Depending on the line of work your business is in, you may be spending a fair amount of time on the road. Traveling frequently for work can mean a towering pile of receipts from transportation, hotels, and food. The price of individual meals can seem insignificant, but they add up quickly. This makes claiming the cost of meals a welcome opportunity for small business owners. However, like everything tax-related, there are guidelines that need to be followed to avoid an unhappy audit. Read on for details on deducting business meals and entertainment, and how to go about claiming those costs.
Play by the rules
As with all other business deductions, meals on work trips need to be ordinary, necessary, and reasonable for the industry you’re in. In order for the trip itself to qualify for deductions, you need to be away from your regular tax home and the trip must be primarily for business.
If you are traveling primarily for business, you can deduct the full cost of your trip (transportation, accommodations, meals). If the trip is primarily personal but includes business activities, you may be able to claim specific meal expenses that are for business purposes. Whether your entire trip qualifies as a business expense or just certain meals, you will claim the relevant expenses on Form 1040.
The IRS lays out some other rules to follow, outlined below.
No lavish or extravagant expenses
The IRS draws the line at expenses that are “lavish or extravagant.” While there is no clear definition provided for what this looks like, there’s a good chance the IRS will frown upon ordering the most expensive wine on the menu every time you dine out. The generally accepted wisdom is to avoid going overboard, and it’s up to your discretion to determine what overboard means to you. If you have a penchant for lobster and champagne, you should just be prepared to defend your meal choices (or pay the difference) in the event of an audit.
Dining out alone
There are stipulations for deducting the cost of meals when you dine out on your own. The bill from a solo meal is deductible only when your business trip is long enough that it requires you to stay overnight, or it requires you to stop for sleep or rest at some point. This means that if you drive to a city three hours away from your regular tax home, work there for the afternoon, and then drive back home, the cost of grabbing lunch on your own is not a deductible expense. On the other hand, if you travel to another city to attend meetings with potential vendors two days in a row before driving home, you are able to deduct all those meal expenses taken alone.
Choosing a deduction method
As a small business owner, you have the option of deducting the standard meal allowance, or 50% of the cost of your meals. The standard meal allowance differs based on where and when you are traveling, but it’s $46 per day for most areas in the US with some areas boasting rates up to $71 (these allowances are going up in 2016).
If you’re not sure which method to use, it’s a good idea to keep all of your receipts and work with an accountant to calculate which method provides the biggest deduction at year end. On the other hand, if you’re sure that your expenses won’t significantly exceed the standard meal allowance, then you can avoid the work of calculating individual expenses and just take the standard deduction. The only important thing to keep in mind is that you can only use one method for an entire fiscal year—so no picking and choosing based on the meal!
Getting away from your standard routine and traveling to other communities can be a great way to network and meet new clients and possible collaborators. The costs of dining out while traveling can add up quickly though and knowing what can be claimed and where the limitations are will help you plan ahead and save your business money.