Hi everyone! I’m Bette Hochberger, CPA, CGMA. Understanding the details of what constitutes meals, entertainment, and employee morale for tax purposes is important for all businesses. Properly categorizing these expenses can lead to significant tax deductions and benefits, so it’s important to know what qualifies and how to handle them. If you’re ready to learn more, keep reading!

Meals

Let’s start off with the main deduction. Meals are a common business expense, but not all meals are treated equally for tax purposes. Here’s what you need to know:

Business Meals

These are meals directly related to your business activities, such as dining with clients, employees, or vendors to discuss business. The IRS generally allows a 50% deduction for these expenses.

Office Snacks and Meals

Providing snacks, coffee, or occasional meals to employees at the workplace is considered a deductible expense. In some cases, these expenses are 100% deductible if they are provided for the convenience of the employer, such as meals provided during meetings or overtime work.

Travel Meals

If you or your employees are traveling for business purposes, meals incurred during the trip are also 50% deductible. Keep detailed records of these expenses, including receipts and documentation of the business purpose.

Entertainment

The rules around entertainment expenses have tightened in recent years, so it’s essential to understand what qualifies:

Directly Related Entertainment

Entertainment expenses that are directly related to the active conduct of business may be deductible, but this is a gray area. For example, taking a client to a sporting event where business is discussed may not be deductible unless it’s an integral part of your business.

Non-Deductible Entertainment

Generally, expenses for entertainment activities such as concerts, theaters, golf outings, or sporting events are no longer deductible. Even if they occur in a business setting, the IRS has ruled out deductions for most entertainment expenses.

Meal Portion of Entertainment

If entertainment includes a meal, the meal portion may still be deductible under the meals category. You must clearly separate the costs of meals from entertainment to claim the deduction.

Employee Morale

Investing in employee morale can create a positive work environment and also provide tax benefits. Here’s what qualifies:

Employee Parties and Events

Expenses for holiday parties, company picnics, or similar events that are open to all employees are 100% deductible. These events are seen as a way to promote team spirit and morale.

Employee Achievement Awards

Non-cash awards, such as plaques, trophies, or tangible property (e.g., a watch), for length of service or safety achievements can be deductible up to certain limits. Cash or cash equivalents (like gift cards) are generally not deductible.

Wellness Programs

If your company provides wellness programs, such as gym memberships or wellness workshops, these may be considered deductible as they contribute to employee health and morale.

Record-Keeping Tips

Keep Detailed Records

Always document the purpose of the expense, who was involved, and how it relates to your business. Receipts, invoices, and notes can be invaluable during an audit.

Use Separate Accounts

Consider setting up separate accounts in your bookkeeping system for meals, entertainment, and employee morale expenses to simplify tracking and ensure accurate categorization.

Consult with a CPA

Tax laws are complex and frequently change. Consulting with a CPA (such as myself!) can help ensure you are maximizing your deductions while staying compliant with IRS regulations.

Properly categorizing meals, entertainment, and employee morale expenses can save your business money and help you maintain compliance with tax laws. By understanding what qualifies and keeping detailed records, you can make the most of these deductions.

If you have any questions or need further guidance on handling these expenses, feel free to reach out to us. We’re here to help you navigate the complexities of tax law and optimize your business finances!

As always, stay safe, and I will see you next time!