Business meal deductions can be confusing.  Just keep in mind these simple rules and you will save you much time and headache when compiling your year-end information –

Rule #1, document, document, document!  Let’s face it, no one wants to have to continuously write down the details of every business meeting, trip or meal. But think of it this way; the IRS will let you deduct a portion of these expenses if you can prove they meet the required conditions.  Why pay more income tax than you owe?  If you keep your receipts, it’s not that big of a deal to routinely organize them, perhaps staple them on a piece of paper and jot down details of the event.

Rule #2, what to document – beginning in 2023, the treatment of meal expense reverted back to allowable expenses as defined by the “Tax Cut and Jobs Act”. Thus, most meal expenses are deductible at 50% (see previous blog post “Business meal expenses – what can I deduct”?).  So what to document?

• Always make note of the date and time, amount, location of the event (these per your invoice copy), as well as why the meeting was held (business purpose) and who attended.
• Always separate meal expenses deductible at 50% from those special situations where you may deduct the entire cost of the meal (see previous blog on types of meal expense and their deductibility)
• In particular, avoid lumping meal expenses and entertainment expenses together (tip – “entertainment” meals can be defined as meals provided to customers or clients as entertainment or as a part of other entertainment; i.e. – entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, meals at a football game, etc.)

Q – Ok, so assuming I have identified my deductible expenses, where do I report them on my tax return?

Typically, these expenses are included on Form 1040, Schedule C Part II, Line 24 (b).

Q – What if my business performed poorly this year, and I have very little revenue.  Can I still deduct all of my expenses such as meals, etc.?

Yes, you can still deduct business expenses in excess of business revenue, generating a net loss that will flow to Schedule 3 reducing your taxable income.  Caution – The IRS will typically allow you to claim business losses for three out of five tax years. Afterward, it may classify your business as a hobby, making it ineligible for tax deductions.

Q – Isn’t the IRS too busy to care about my small business?  I mean, how important is this, and will it ever be looked at or audited?

Yes, the IRS is currently focused on high income taxpayers and those that have multiple years of tax non-payment.  However, don’t be fooled into non-compliance.  The IRS generally audits returns filed within the past three years but can go back as far as six; even further if taxpayer fraud is suspected.  Also, they recently have added a tremendous amount of funding and personnel dedicated to tax return reviews, and Schedule C filers (small business) have always been a focus.  So don’t take the chance!

At CPA Mobile Tax Services, we are happy to answer your questions, so feel free to send us a call or a contact note.