Part 1 of 3: Easy Targets - Meals, Mileage, and Home Office deductions, soft audit targets for the self-employed.
“Soft target” is a military expression, referring to something that is relatively unprotected or vulnerable to an attack. An audit on your tax returns by the IRS is clearly not a military attack, but it can be quite brutal if your business expenses are… “open to interpretation”, or not well supported. This is the first of 3 articles we will be posting to help business owners understand how to best take advantage of some key deductions on your tax returns and the rules and requirements that will allow you to take those deductions with confidence that they are accurate and valid.
If you are self-employed – that is, if you file your revenues and expenses for a business activity on a Schedule C, some meal expenses that you pay could qualify as business meals and be deductible, from 50% up to 100% on your Schedule C. I’ll summarize the main requirements and how the deduction works, and I’ll also share a few practical tips about common mistakes that you can avoid.
First, here are the broad categories of meal purchases that are eligible as business deductions:
1. Travel meals – meals that you purchase for yourself and/or your employees while traveling for business purposes at least 50 miles away from home and for more than 8 hours.
2. Meals with current or potential clients/customers.
3. Meals with consultants or colleagues where there is a business purpose.
4. Meals you provide to your employees for your convenience – at the business location or work site.
5. Meals for company retreats or holiday parties for your employees.
6. Snacks for employees, including tea or coffee or soft drinks – basically the goodies in the breakroom.
Tip: -Just because you’re 15 miles from home at lunchtime doesn’t mean you’re traveling for business – consider the 50-mile/8-hour limitation. Such a meal may qualify under one of the other categories, but it isn’t a travel meal.
Tip: -Be prepared to prove it. Checks and credit card statements are clear proof of the expense if you meet the travel meal requirements or if you’re providing meals for employees. Meals with clients or colleagues require more than that – you will need a receipt with a handwritten notation of WHO you ate with and WHY it was a business meal. A simple “Lotta Doe, client” or “Will Barrow, supplier” is all that’s needed.
Now – How much can you deduct? At least 50% of a qualifying business meal is deductible. But wait – there’s more: during 2021 and 2022, the latest COVID relief bill increased that amount for meals purchased from a restaurant (not a grocery store, market, big-box department store,..etc) – so qualifying meals from a restaurant are 100% deductible for ’21 and ‘22.
Tip: The non-restaurant meals still count – just 50%. Separate the two in your records or receipt piles and your tax preparer will appreciate your consideration. Just saying.
To summarize a few more requirements you should be aware of –
The IRS uses terms like “lavish” or “extravagant” to prohibit expensive meals that are out of context. A $6,000 steak is hardly necessary in just about any business context. And workers at a worksite can hardly finish the day if you feed them 18 pounds of pasta with alfredo for lunch. Keep it reasonable. I know that’s hard to specifically define but you know it when you see it.
You or an employee must actually be present for the meal. Hard to eat when you’re not.
Oh and the biggie – no entertainment expenses can be included. If you take someone to a ball game (for business purposes, of course), the brats and beer are deductible but not the tickets to the game. Keep separate receipts.
Lastly, be sure and check with your return preparer or accountant if you have questions about whether a meal is deductible. This could save you some grief later. And money.