Is it Meals or Marketing Expense?
Know the difference.
Tips to help ensure you follow the rules.
It used to be common practice to lump together things like taking a client to a baseball game and treating them to dinner as “meals and entertainment” expense. Both of those items were generally 50% deductible. The Tax Cuts and Jobs Act changed that.
Although stand-alone business meals remain partially deductible, entertainment expenses can’t be deducted at all. At first glance, it seems as though it should be easy enough to draw a line between meals and entertainment, but it can actually get quite tricky in the real world. Throwing marketing expenses in the mix just makes it more confusing.
Here are some basic rules for writing off meals and entertainment versus marketing costs.
Which meals and entertainment expenses are no longer deductible?
Here are some examples of meals and entertainment expenses that are no longer deductible, thanks to the Tax Cuts and Jobs Act.
The cost of entertainment, like a sporting event, concert, or theater tickets, rounds of golf, etc.
Meals that are included in the cost of those entertainment outings
Skiing or fishing trips and other recreational activities intended to entertain clients or develop new business
For example, say an oral surgeon invites a dentist to a Reno Aces game to discuss forming a referral partnership. The oral surgeon buys the game tickets. This is considered entertainment, so the cost of the tickets is not deductible.
Which meals are deductible?
Business meals on their own generally remain 50% deductible. This includes things like:
Business meals with clients
The cost of meals while traveling for work
Lunch out with less than half of company employees
Business meals provided for the convenience of the employer, such as those at a company cafeteria (formerly 100% deductible) or ordering dinner for staff who need to work late
Expenses for food and beverages that are excludable from employees’ income as “de minimis fringe benefits,” such as breakroom snacks (formerly 100% deductible)
Note: For the 2021 and 2022 tax years, businesses are allowed to fully deduct business meals that would normally be 50% deductible. This temporary deduction is designed to stimulate the restaurant industry as it recovers from the COVID-19 pandemic.
Some business meals are still 100% deductible. This includes:
Social activities for employees, including holiday parties, company picnics, and mentoring events
Company events that are open to the public and where food and beverages are provided, such as grand opening celebrations
To help taxpayers sort through meals and entertainment deduction questions, the IRS issued proposed regulations in February 2020. The proposed regulations provide a five-part test to help business owners determine whether a business meal is deductible. The meal is 50% deductible if:
The expense is an ordinary and necessary business expense
The meal isn’t lavish or extravagant under the circumstances
The business owner or an employee is present
The food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact, and
In the case of food or beverages provided during or at an entertainment activity, the food and drinks are purchased separately from the entertainment or their cost is stated separately on one or more bills, invoices, or receipts. The meal cost must also be reasonable. In other words, you can’t circumvent the disallowance of entertainment deductions by inflating the charge for food and beverages.
Going back to our Reno Aces example from before, assume the same facts except that the oral surgeon also buys hot dogs and drinks for both themselves and the dentist. The cost of the food and beverages, which are purchased separately from the game tickets, is not an entertainment expense. Therefore, the oral surgeon may deduct 50% of the food and beverages purchased at the game.
On the other hand, say the oral surgeon purchases a luxury suite at the ballpark. The cost of the suite includes game tickets as well as buffet-style food and beverages. To thank the dentists for referring business, the oral surgeon gives all the game tickets to the dentist, allowing them to invite staff and family members. The oral surgeon doesn’t attend the game. In this case, the entire expenses would not be deductible because the cost of the food and beverages is included in the entertainment cost. Also, because the oral surgeon (or an employee) was not present.
What are deductible marketing expenses?
Marketing expenses meant to help you bring in new customers and keep existing clients continue to be tax-deductible. This can include things like:
Advertising via social media, search engines, banner ads, newspapers, television, and direct mail campaigns
Public relations and promotional expenses, such as sponsoring a sports team or promotional items like mugs, t-shirts, and pens
Printing materials such as business cards, brochures, and letterhead
But some marketing expenses toe the line between deductible meals, non-deductible entertainment, and marketing expense.
Let’s consider some common examples.
Custom labeling wine as a gift
Many business owners gift bottles of wine customized with a label featuring the business logo and contact info. The cost of the label is 100% deductible as a marketing expense, so be sure to track the cost of the labels and wine separately.
The other issue is the cost of the wine. Remember, IRS rules limit the deduction for business gifts to $25 per person, per year. For inexpensive bottles, this may not be an issue. However, if you gift higher-priced bottles, your deduction will be limited.
Hosting a “lunch and learn”
Many physicians host lunch and learns where they provide a meal while promoting the services they offer to potential patients or referral partners. Since the business pitch essentially lasts the entire duration of the event, you can deduct the entire cost as a promotional event.
On the other hand, if you host a happy hour attended by both staff and customers, and the purpose is primarily social rather than educational, the 50% meals limitation applies. This is true even if you spend a few minutes during the event promoting your business.
Sponsoring a golf outing
If you sponsor a golf outing where customers are invited for a round of golf followed by lunch, make sure the cost of food and beverages is invoiced separately. The cost of the golf would be considered entertainment, and thus is no longer deductible. But you could still benefit from the 50% deduction for meals. And any customized signage or promotional items given away at the event can be deducted as marketing expenses.
In light of these more complicated rules, we highly recommend eliminating the catchall “Meals & Entertainment Expense” account. Instead, create separate categories for meals that are 100% deductible, meals that are 50% deductible, non-deductible entertainment expenses, and fully deductible marketing expenses.
If you need help with your company’s accounting, schedule a call with Slate. We can help you properly account for meals and marketing expenses to ensure you take advantage of every available deduction at tax time.