Your Guide To Deducting The Cost Of Meals And Entertainment

Picture this: you meet with a prospective business partner at a nice restaurant for dinner to talk business. Things go great, and by the end of the night, you politely reach for the bill while vaguely remembering something you read online about business meals and tax deductions. Is this a business meal? Is this a tax deduction? Is there a way for you to report this?

Of the many IRS landlord tax deductions, the meals and entertainment deduction is one of the most confusing, as its specifics tend to change depending on current events and the state of the economy (like the temporary tax code change to help restaurants during the Covid-19 pandemic). With this in mind, it’s important to know exactly what qualifies each year and what doesn’t. Below, we’ll dive into everything you need to know concerning the meals and entertainment deduction 2024 has to offer.

What is the Meals and Entertainment Costs Deduction?

The meals and entertainment deduction is exactly what it sounds like. Businesses of all kinds and sizes use it to write off 50% of business-related meal and entertainment expenses as tax deductions.

With the updated tax code, however, much fewer entertainment costs qualify as tax deductions because they must be directly related to business. You can’t take a prospective lender to a basketball game and expect the tickets to qualify as tax write-offs, for example, as this is not business-related or necessary. However, it’s more likely that taking employees to something such as a real estate business conference where entertainment may take up a portion of time will qualify. We’ll discuss how to qualify for this deduction in depth below.

How to Qualify for the Meals and Entertainment Costs Deduction

Not just any meal can qualify for this 50% deduction, as it must meet a series of criteria. For starters, the IRS website dictates that:

• The business owner or employee must be present when the meal is provided. Business meals do not have to include a third party, so meals during business travel or for conferences/meetings, etc. can still qualify.
• Meals must be from restaurants, which are defined as businesses that “prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.” Essentially, this would not allow you to deduct purchases from grocery stores and the like.
• The meal cannot be “lavish or extravagant.” The definition of a reasonable meal expense varies heavily depending on the field, location, nature, etc., so use your own discretion.

As previously mentioned, the updated meals and entertainment deduction 2024 businesses must abide by allows owners to write off very few (if any) entertainment expenses. Business seminars and conferences with entertainment involved may qualify, as well as any entertainment that you can prove is directly related to business. As this is relatively difficult to justify in the real estate world, it’s recommended to stick to deducting meal expenses. If entertainment involves a meal, then you can deduct the meal alone so long as you can separate the expenses accordingly.

Through a different deduction, business owners are also able to write off 100% of the expenses related to employee benefit meals such as holiday parties, picnics, etc. These are to be kept “ordinary and necessary” and not extravagant. There are a few other exceptions to the 50% deduction rule, but they are less common and more niche.

Calculating the Meals and Entertainment Costs Deduction

Calculating this deduction is relatively simple. Since this expense includes tax and tips, you can calculate 50% of the total from the final amount that you are charged. Additionally, you must keep a close record of these business meals. To qualify, you’ll need itemized receipts, and for safe measure, a record of who was in attendance.

There is another nuance within this particular tax break, and it pertains to business travel. Generally, when traveling for extended periods for business, you can also obtain necessary meals and deduct 50% of them as well. Using the standard meal allowance is a less common way to track your meal expenses when traveling for investment or income-producing property. This essentially gives you the daily amount you are allowed to deduct for meals depending on where you are in the contiguous United States.

Claiming/Reporting the Meals and Entertainment Costs Deduction

For smaller rental property businesses, you will generally claim and report this deduction on the corresponding lines on Schedule E (Form 1040). For instance, the sum of 50% of each travel-related meal will be filed in Part I as seen on the 2024 version under “Auto and travel” (reporting under “Other” is also common and typically accepted). Depending on how you classify each meal (and the less common entertainment expenses), you may want to report them onto different corresponding lines.

If you’re a landlord who provides services beyond those typical of a rental business, then you may need to report your expenses on Schedule C instead. Talk to a trusted tax professional before filing to ensure you understand what forms you must fill out to remain compliant with tax laws.

To stay organized, some companies keep separate meal ledgers, where they carefully record each meal expense. This will typically include dates, itemized receipts, tip amounts, and the portion they plan to deduct (50% of the total). Keeping a separate meal ledger can make claiming this deduction much easier when tax season rolls around and can potentially protect you and your business in the event of an audit.

How Much Can I Save With the Meals and Entertainment Costs Deduction?

If you spend a notable amount annually on business-related meals and travel, you can save a lot of money. Depending on your tax bracket and a couple of other factors, you can save hundreds to thousands of dollars. So long as each meal meets the previously discussed criteria, you can split it down the middle and write it off as a tax deduction. There’s no cap on the total amount you can deduct for meals so long as you follow the guidelines and meet every qualification for each and every meal. If the IRS suspects your deduction is off, then they may audit you. In this event, it’s important that you’re prepared with records and receipts.

Conclusion

There are many IRS landlord tax deductions available to you—the meals and entertainment deduction is but one of many. If you find yourself taking lenders, partners, or employees out for meals to discuss business, then this deduction is for you. So long as you keep your meals reasonable and you maintain organized itemized receipts, you’re set up to save half of what you spend!