When Is Lunch Deductible?

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Sometimes a local restaurant is the best place to meet with clients. It may be more convenient and since you both have to eat, it makes sense to turn lunch into a business expense. Bringing in lunch for your employees can also turn a meal into a business deduction. But there are also many situations in which your lunch isn't deductible, even if you're eating it at your desk. Knowing the difference can make a big difference in your tax burden.

Feeding Your Clients

The IRS generally classes dining expenses under the broader category of entertainment expenses and makes them a little harder to write off than one might hope. Like any other business expense you plan to deduct, the IRS expects that the cost of your meal is both an ordinary and necessary cost of doing business. By that logic, most meals aren't deductible — after all, you'd still be eating lunch if you didn't own a business.

But as long as a meal meets the requirements of one of the two tests used by the IRS, it can be either entirely or partially deductible. The first test is whether the expense is directly related to your business. To pass that test, the IRS requires you to show "The main purpose of the combined business and entertainment was the active conduct of business; You did engage in business with the person during the entertainment period; You had more than a general expectation of getting income or some other specific business benefit at some future time."

The alternative is proving that your expenses meet the associated test. To do so, you must show that the expense is "Associated with the active conduct of your trade or business, and directly before or after a substantial business discussion."

In general, you can deduct only fifty percent of your meal and entertainment expenses if they're related to your business. However, depending on what kind of business you run, you may be able to take advantage of exceptions to the fifty percent limit. For instance, meals and entertainment provided to the general public as part of a marketing campaign can be deducted in full.

Feeding Your Employees

If you buy a pizza for employees working late or throw a catered holiday party for your staff, the expense is generally deductible — although your own share of those meals may not be. More than a few companies list these expenses under office supplies, whether or not that's actually a suitable category. However, it is worth noting that meals for your employees are generally not a matter of entertainment expenses, though if you buy lunch often enough, it may be considered more of a fringe benefit.

Entertainment Expenses

Alex Serrano, a CPA and partner in the accounting firm Citrin Cooperman, has seen the question of deducting lunches and other expenses from both sides of the table. He's seen plenty of unusual expenses for dining and other entertainment that his clients have wanted to write off, including a cricket sports luxury box in England — the rental of the box is not a valid entertainment expense, Serrano notes, all the actual cost of entertaining using those facilities can be written off.

Serrano says that keeping a record of your entertainment expenses can make the process of writing them off significantly easier. You must keep that record in the moment, though — trying to recreate such a record from bank statements and receipts at the end of the year won't do any good. Nor should you rely on your receipts and scribbling a description of who you ate with and why. It's too easy to lose receipts or to be unable to interpret just what you wrote down.

There are plenty of methods to maintain such records. Serrano says that the most important factor is not which tool you use, but being able to to keep track of dining expenses.

The key is that they set up a system for recording and maintaining these records that will work for them throughout the year. It doesn't matter if it's on a blackberry, their laptop, a spreadsheet program on their desktop, or even if they keep the records in a notebook. The key is that they keep the records in real time or contemporaneous as the IRS describes, meaning that the description of the expense and basic details need to be recorded at the time of the expense.

Your records need to include the time, date, location, participants and a description of what business was discussed.

A Business Based on Food

If you operate a business that revolves around food, lunch may not fall into the category of entertainment expenses. Instead, those tasty treats may be a matter of research. Tracy Kellner, the owner of Provenance Food and Wine, routinely visits specialty food shops when she's traveling. She's able to write off her purchases as business expenses not because she's using them but because they're research into what her competition is selling, as well as what products new vendors have on the market.

Kellner says that she doesn't set budgets for these trips.

I will read the product labels to see if there is a website or importer listed. If I’m not able to purchase the product at the time, I’ll contact the producer/importer directly to try and obtain samples. I would say on average, these purchases are around $30 to $50.

She takes multiple trips a year and has never had a problem claiming the expenses on her taxes.

Your Own Entertainment Expenses

Because the rules around deducting food and other entertainment expenses can be complex, it's best to consult your CPA or tax preparer. Every business' tax situation is different, but a tax professional familiar with your business can give you more detailed advice about how to handle deducting your lunches.

But by knowing the rules, you've got a better chance of ensuring that the IRS won't reject your deductions on the basis that they meet neither the directly-related or associated tests.