Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.
Meals become a legitimate tax deduction only in these two situations:
You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
The meal is related to your business or job.
If you satisfy either of the two situations, then your meal becomes a deductible expense.
Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.
Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.
Too Lavish or Extravagant Meals
The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?
Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.
If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.
Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.
50% Limit on Meals
In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:
The Standard Meal Allowance.
Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.
Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.
This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.
Standard Meal Allowance
If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.
Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course, you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.
The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?
According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.
While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.
There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the number of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything on your meals.
You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.
But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.
50% Limit on Meal Deductions
Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of your standard meal allowance.
This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.
Are You Allowed to Use the Standard Meal Allowance Method?
Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.
If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.
Is There Any Standard Rate for the Standard Meal Allowance?
The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travel in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.
If you want to know the amount of standard meal allowance in the state you are in, you may visit www.gsa.gov/perdiem for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates through the dropdown menu.
What if You Travel to More Than One Location in a Day?
If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.
But how do you know that you are working in the transportation industry? Take a look at these requirements:
Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.
Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.
When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.
What if You Travel Outside the U.S.?
The Department of Defense has assigned locations that can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.
There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa, and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.
If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that applies to your travel location, go to www.defensetravel.dod.mil/site/perdiemCalc.cfm. But if your travel location is a foreign area, you must go to www.state.gov/travel/. Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.
Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.