What expense category is Meal Expenses?

Meal expenses are a frequent expenditure for many businesses, whether they're incurred during business travel, client meetings, or employee-related activities. For accountants and Small to Medium-sized Business (SMB) owners, understanding how to properly categorize and manage these expenses is essential for accurate financial reporting and tax compliance. The Internal Revenue Service (IRS) has specific rules regarding the deductibility of meal expenses, making careful classification critical.

This guide will delve into the meal expenses category, highlight important considerations for classification, provide examples of business-related meal expenses, explain the tax implications as per IRS guidelines, and show how Fyle can help automate and simplify the tracking of these costs.

Meal Expenses Category

Meal expenses in a business context refer to the costs of food and beverages consumed by owners, employees, or in connection with business activities involving clients, customers, or other business associates. These are generally treated as operating expenses.

In an accounting system, meal expenses might be tracked under categories such as:

• Travel Expenses: For meals consumed while traveling away from home for business purposes.
• Business Meals: For meals with clients, prospects, or partners where business is discussed.
• Employee Welfare/Meeting Expenses: For meals provided to employees in specific circumstances.

The key is to have a clear categorization that aligns with IRS rules for deductibility and allows for proper application of any limitations, such as the 50% limit.

Some Important Considerations While Classifying Meal Expenses

Business Connection 

The meal must be an ordinary and necessary expense related to your business. This means it should be common and accepted in your industry and helpful for your business.

Taxpayer's Presence

For business meals (not necessarily travel meals), the taxpayer or an employee of the taxpayer generally must be present when the food or beverages are provided.

Not Lavish or Extravagant

The cost of a business meal cannot be lavish or extravagant under the circumstances. While this doesn't automatically disallow meals at deluxe venues, the expense must be reasonable based on the facts and circumstances.

Entertainment Disallowance

Since 2018, entertainment expenses are generally non-deductible. If meals are provided during or at an entertainment event, their cost is deductible only if purchased separately from the entertainment, or if the cost is stated separately on one or more bills, invoices, or receipts. Inflating the cost of food and beverages to circumvent the entertainment disallowance is not permitted.

Travel Meals

The cost of meals (food, beverages, taxes, and tips ) is deductible if your business trip is overnight or long enough that you need to stop for substantial sleep or rest to properly perform your duties[cite: 4376, 3684].

Employee Meals (Non-Travel)

• Compensation: If meals are provided to employees and the value is treated as taxable compensation and wages (reported on Form W-2), the employer can deduct the full cost, and the 50% limit does not apply to the employer.
• De Minimis Meals: Food or beverage expenses excludable from employee income as a de minimis fringe benefit (e.g., occasional coffee and donuts) are generally subject to the 50% limit for the employer.
• Company Functions: Expenses for recreational or social activities for employees (like holiday parties or company picnics) are generally fully deductible if they are primarily for the benefit of non-highly compensated employees.

Recordkeeping

Meticulous recordkeeping is crucial for meal expenses. You must be able to prove:

• The amount of each separate expense for meals.
• The date of the meal.
• The place of the meal (name and location of the restaurant).
• The business purpose of the expense or the business benefit gained or expected.
• The business relationship of the persons entertained (for business meals, not necessarily solo travel meals).
• Documentary evidence (like receipts) is required for any lodging expense and any other expense of $75 or more, except for transportation if a receipt is not readily available. A restaurant receipt should ideally show the name and location of the restaurant, the number of people served, the date, and the amount.

Also Read: Travel & Entertainment Expenses Frequently Asked Questions 

Standard Meal Allowance

For travel away from home, you can use the standard meal allowance (federal M&IE rate) instead of actual costs. This allowance is also subject to the 50% limit.

Examples of Meal Expenses

Common deductible business meal expenses include:

• Meals consumed while traveling overnight for business.
• A lunch with a client to discuss a pending business deal, provided business was the primary purpose and it was not lavish or extravagant.
• Dinner with a prospective customer immediately following a substantial business discussion.
• Food and beverages provided at a company holiday party for employees (if it meets the criteria for being primarily for non-highly compensated employees).
• Meals included in the registration fee for a business convention.
• Coffee and donuts provided for employees during a business meeting on company premises (subject to the 50% limit for the employer).
• The separately stated cost of food and beverages at a sporting event where a client was also present and business was discussed appropriately before or after the event.

Tax Implications of Meal Expenses

The 50% Limit

Generally, businesses can only deduct 50% of the cost of otherwise allowable business-related meals. This applies to both meals while traveling and business meals with clients or associates. Taxes and tips related to the meal are included in the amount subject to the 50% limit.

Note: The temporary 100% deduction for business meals provided by a restaurant, which was in effect for 2021 and 2022, has expired. The 50% limit is the current general rule.

• Exceptions to the 50% Limit:
  
  • Expenses treated as compensation to an employee and as wages for tax purposes.
  • Reimbursed meal expenses for employees under an accountable plan (the employer is subject to the 50% limit on the original expense).
  • Meal expenses for which a self-employed person is reimbursed by a client, provided there's an adequate accounting (the client is then subject to the 50% limit).
  • Expenses for recreational or social activities for employees (e.g., holiday parties, company picnics) that primarily benefit non-highly compensated employees.
  • Expenses for meals made available to the general public (e.g., food samples at a trade show).
  • The cost of meals that a business sells to the public (e.g., a restaurant's cost of food for meals it sells).
• "Hours of Service" Limit for Transportation Workers: Individuals subject to the Department of Transportation's "hours of service" limits (such as certain pilots, truck drivers, and train crews) can deduct 80% of their qualifying meal expenses while traveling away from their tax home.
• Non-Deductible Meal Expenses:
  
  • Meals that are lavish or extravagant.
  • The portion of a meal expense that is for personal, non-business purposes.
  • Meals lacking a clear and substantiated business purpose.
  • The cost of meals consumed at an entertainment event if the cost is not stated separately from the entertainment.
• Substantiation for Tax Purposes: The IRS requires detailed records to support meal expense deductions, including receipts for any expense of $75 or more (except certain transportation). For each meal, you should record the amount, date, place, business purpose, and the names and business relationship of the people who participated (if applicable).
• Reporting: For sole proprietors filing Schedule C (Form 1040), the deductible amount of meal expenses (after applying the 50% limit) is typically reported on line 24b, "Deductible meals".

How Fyle Can Automate Expense Tracking for Meal Expenses

Managing meal expenses, applying the correct deduction limits, and ensuring compliance with IRS recordkeeping rules can be complex and time-consuming. Fyle’s expense management software helps automate this process:

Real-Time Credit Card Feeds 

When meals are paid for with a linked corporate credit card, Fyle captures transaction data immediately. This allows for timely expense submission and reconciliation.

Effortless Receipt Collection and Matching

Employees can easily submit meal receipts via SMS, email (Gmail/Outlook), Slack, or the Fyle mobile app. Fyle's intelligence can automatically match these receipts to the corresponding card transactions.

Automated Policy Enforcement 

Fyle's robust policy engine can be configured to automatically:

• Apply the 50% limit to eligible meal expenses.
• Flag expenses that might be considered lavish or extravagant based on predefined thresholds.
• Remind users to add attendees and business purpose for meal expenses.
• Check for duplicate submissions.

Per Diem Management for Travel Meals

If your company uses per diems for travel meals, Fyle can help manage these allowances, ensuring accurate calculations based on location and travel dates.

Streamlined Approval Workflows

Meal expense reports can be routed through custom approval workflows, and approvers can approve on the go via the mobile app, email, or Slack.

Enhanced Spend Visibility

Dashboards and analytics provide a real-time overview of meal spending across the organization, categorized by employee, project, department, or merchant, aiding in budget control and compliance monitoring.

Direct Accounting Integrations

Fyle seamlessly syncs meal expense data, including the applied 50% limit and attached receipts, to leading accounting systems like QuickBooks Online, QuickBooks Desktop, NetSuite, Sage Intacct, and Xero. This ensures your books are always accurate and audit-ready.

By leveraging Fyle, accountants and SMB owners can significantly reduce the manual effort involved in managing meal expenses, improve compliance, and gain better control over this common business expenditure.