Business meals and entertainment: A summary of tax deductions

Entertainment

Generally, entertainment expenses are 100% nondeductible unless an exception is met. This means that no deduction is allowed for any expense with respect to an activity generally considered to constitute entertainment, amusement, or recreation, or for a facility used in connection with such an activity, even if the activity is related to the employer’s trade or business. Entertainment is defined broadly to include activities such as taking business associates (clients, suppliers, employees, etc.) to bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips. Generally, activities in these categories are considered entertainment for tax purposes, even though the employer’s intent is to deepen client relationships or bring in more business.

Examples

1. An employee takes a customer to a baseball game. The cost of the tickets is nondeductible.
2. A company’s executive team enters a golf tournament sponsored by a client. The expenses related to the executives playing golf (i.e., greens fees, cart rentals, etc.) are nondeductible.
3. A company takes a group of clients on a fishing trip. The transportation, lodging, and fishing-related expenses are nondeductible.

There are several exceptions that, if met, may allow entertainment expenses to be deductible. These exceptions are:

• Expenses that are treated as compensation to an employee and as wages for tax purposes.
• Expenses that are reimbursed under certain expense allowance arrangements with customers.
• Expenses for recreational, social, or similar activities primarily for the benefit of employees (other than highly compensated employees and certain shareholders/owners).
• Expenses directly related to business meetings of employees, stockholders, agents, or directors.
• Expenses directly related and necessary to attendance at business meetings or conventions of certain tax-exempt organizations.
• Expenses for goods, services, and facilities made available to the general public.
• Entertainment sold to customers in a bona fide transaction for adequate and full consideration.
• Expenses includible in the gross income of a recipient who is not an employee.

Expenses for food and beverages provided at or during an entertainment activity are generally treated as part of the entertainment and are nondeductible. However, if the following requirements are met, the entertainment remains nondeductible, but the food and beverage expenses would proceed to another layer of analysis to determine their deductibility. If the following are satisfied, then the expenses are generally deductible:

• The food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts; and
• The amount charged reflects the venue’s usual selling price or the reasonable value of the items.

For example, if an employee takes a client to a baseball game and purchases hot dogs and drinks from a ballpark vendor, the deduction for the cost of the hot dogs and drinks can be evaluated separately from the disallowed deduction for the tickets.

Meals

In this section, the reference to “meals” refers to the expense, which may include the cost of food and beverages, including delivery fees, tips, and sales tax, regardless of whether characterized as meals, snacks, or other types of food and beverages. A meal expense may be 50% deductible, 100% deductible, or 100% nondeductible, depending on the facts and circumstances.

50% deductible meals

Generally, meals are 50% deductible unless an exception is met.  Most meals fall into this category.

Examples

1. Snacks in a breakroom for employees (not associated with an “employer-operated eating facility”).
2. Business lunch with a customer.
3. Food and beverages for clients at a tailgating party at a sporting event.

100% deductible meals

Meals that are in the following categories are typically 100% deductible:

• Meals that are treated as compensation to an employee and as wages for tax purposes.
• Meals that are reimbursed under certain expense allowance arrangements with customers.
• Meals provided during recreational, social, or similar activities primarily for the benefit of employees (other than highly compensated employees and certain shareholders/owners).
• Meals that are made available to the general public.
• Meals that are sold to customers in a bona fide transaction for adequate and full consideration (such as by a restaurant).
• Meals that are includible in the gross income of a recipient who is not an employee.
• Meals provided to certain employees or crew members of commercial vessels, fish processing facilities, oil or gas platforms or drilling rigs.

Examples

1. Dinner at a “pumpkin-patch” party that is open to all employees and their families.
2. Meals for restaurant employees before, during or after their work shifts.
3. Weekly lunches provided on-site to employees in the office, the value of which is included in their taxable income.
4. Snacks and drinks provided by a company to all runners participating in a charitable event that is open to the public but partly sponsored by the company.

100% nondeductible meals

Some meal expenses are 100% nondeductible, such as:

• Meals that are lavish or extravagant, given the circumstances.
• Meals that are provided to business associates where an employee or owner of the employer is not present (such as via meal gift certificates).
• Meals that are provided to persons who are not business associates of the employer.
• Meals that are provided at or during an entertainment activity that are not separately invoiced or identified.

Beginning in 2026, the following expenses are also 100% nondeductible (unless they meet certain limited exceptions):

• Meals provided to employees for the convenience of the employer and not taxed to the employees. In general, meals are for the convenience of the employer if they are provided in-kind on the employer’s business premises and are necessary for the employees to perform their duties. Examples include meals provided on-site to employees restricted to short meal periods for business reasons, who must be available for emergencies or who work in remote locations.
• Expenses for the operation of an employer-operated eating facility, including any expense for meals associated with the facility. This includes expenses for certain on-site cafeterias and dining rooms for employees (depending on the facts).

Examples

1. Lunches for employees participating in a client’s golf tournament if the cost of the lunches is included in the registration price and not separately identified.
2. Meals furnished by an employer to construction workers assigned to a remote location without eating facilities in the vicinity.
3. Discounted employee meals provided at an on-site cafeteria.

Substantiation required

Substantiation is key to supporting the tax deductibility of meals and entertainment expenses. Even for items that are partially or fully deductible, failing to meet substantiation requirements would preclude a deduction. An employer must have records supporting the amount, time, place, and business purpose of the expense, and the business relationship to the employer of the persons benefiting from the meals or entertainment.

The IRS permits a company to use statistical sampling to help ease the process of categorizing relevant expenses. Pursuant to Rev. Proc. 2011-42, taxpayers can select an appropriate random sample of various types of expenses, analyze for the correct tax deduction treatment (which could be 100% deductible, 50% deductible or nondeductible), and then extrapolate that percentage to the entire meals balance. Statistical sampling may increase or decrease the expected tax deductions, depending on what is found in the sampling. Sampling can also uncover weaknesses in expense data collection that can allow the company to support and strengthen their substantiation going forward by incorporating the deduction rules into their accounting policies and data collection systems.

Key takeaways

Now is a good time for employers to review how they are applying the deduction rules for meals and entertainment expenses. It is important to keep in mind that the rules often limit the expense deduction to 50% or cause it to be altogether nondeductible. While exceptions exist, each requires careful consideration and application to an employer’s specific facts in order to determine whether or not it can be utilized. A thorough review to set up good practices with respect to internal information collection and recordkeeping can go a long way towards proper tax reporting.