IRS Meal Allowance

IRS meal allowance, two people having dinner

Generally, the cost of meals are considered a personal expense and are not deductible, unless they meet certain IRS rules.

For example, if you go out to lunch yourself during the course of your work day or with a business associate, and there is no business purpose other than to simply get a bite to eat, the cost of your lunch is a personal expense and is not deductible.

When Meal Costs are Deductible

You can deduct meal and entertainment expenses only if they are both ordinary and necessary (not lavish or extravagant) and meet either one of the following two tests (discussed below).

  1. Directly-Related test
  2. Associated test

Note Ordinary and Necessary:
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.

Note Lavish and Extravagant:
The cost of a meal should be reasonable for the circumstances. For instance, if you wine and dine a prospective client at the Waldorf Astoria instead of Bob's Hamburger Heaven because your client is staying at the Waldorf, a higher meal cost would be reasonable.

Whether the cost of a meal is lavish and extravagant is really a judgment call because there is no dollar limit on what constitutes lavish or extravagant. Use your common sense and be sure to document your costs.

Directly-Related Test

To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:

  • 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, and
  • You had more than a general expectation of getting income or some other specific business benefit at some future time.

It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test.

Associated Test

Even if your expenses do not meet the directly-related test, they may meet the associated test.

To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment was:

  • Associated with the active conduct of your trade or business, and
  • Occurred directly before or after a substantial business discussion

Directly Before or After a Business Discussion:

If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion.

However, if the entertainment and the business discussion are not held on the same day, the associated test may still be met, depending on the facts of the situation.

Among the facts to consider are the place, date, and duration of the business discussion. If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day.

For example, if a group of business associates come from out of town to your place of business to hold a substantial business discussion and you entertain them on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion and the expense meets the associated test.

Expenses Associated with Your Trade or Business:

Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for incurring the expense. The purpose may be to get new business or to encourage the continuation of an existing business relationship.

Substantial Business Discussion:

Whether a business discussion is substantial depends on the facts of each case. A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to generate income or some other specific business benefit.

The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. It is not necessary that you devote more time to business than to entertainment. You do not have to discuss business during the meal or entertainment.

Entertainment Facility

An entertainment facility is any property you own, rent, or use for entertainment, such as a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.

According to the IRS, business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats.

Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility, such as depreciation and operating costs (i.e. rent, utilities, maintenance, and security).

Out-of-pocket Expenses:

You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility because these are not expenses for the use of an entertainment facility. However, these expenses are subject to the directly-related test, associated test, and 50% limit.

Expenses for Spouses

You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment.

Example:

  • You entertain a client. The cost is an ordinary and necessary business expense and is allowed under the entertainment rules (they meet either the directly-related test or the associated test).
  • The client's spouse joins you because it is impractical to entertain the customer without his spouse being present.

Result:

  • You can deduct the cost of entertaining the client's spouse.
  • In addition, if your spouse joins the party because the client's spouse is present, the cost of the entertainment for your spouse is also deductible.

Two Methods for Deducting Meal Costs

There are two methods for deducting meal costs:

  • Actual Costs
  • The IRS Standard Meal Allowance (discussed below)

Actual Cost

You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. If you use this method, you must keep records of your actual cost.

IRS Standard Meal Allowance

The standard meal allowance is the federal M&IE (meals and incidental expenses ) rate.

You can use the standard meal allowance method as an alternative to the actual cost method. It allows you to use a set amount for your daily M&IE, instead of keeping records of your actual costs. The set amount varies depending on where and when you travel.

The M&IE allowance is broken down into:

  • Breakfast
  • Lunch
  • Dinner
  • Incidentals

Amount of Standard Meal Allowance:   

For travel in 2015, the rate for most small localities in the United States is $46 a day for the period January 1 through September 30, 2015, and $51 a day for the period October 1 through December 31, 2015.

NoteThe FY 2016 Meals and Incidental Expenses (M&IE) Breakdown provided by the Government Services Administration (GSA) shows a table with six tiers of rates ranging from $51 to $74 for the lower 48 continental United States. The table also lists the portion of the M&IE rate that is provided for incidental expenses (currently $5 for all tiers).

The term incidental expenses means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships  

Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances.

The basic and high-cost area rates are determined by U.S. General Services Administration.

Using the Standard Meal Allowance:

You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your travel expenses.

You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment property and other income-producing property.

You can also use the standard meal allowance to figure your meal expenses when you travel for qualifying educational purposes.

You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes.

If you're self-employed and find it difficult to keep records of your meal costs while traveling away from home on business trips within the Continental United States (CONUS), you can use the Domestic Per Diem Rates.

The rates in the tables coincide with the government's fiscal year, which runs October 1 through September 30. For example, the 2016 fiscal year runs October 1, 2015 through September 30, 2016.

There are about 3,000 counties in the Continental United States (CONUS). If you need to deduct a meal amount, first determine the location where you will be working while on official travel. You can look up the location-specific information at www.gsa.gov/perdiem.

Higher rates apply in major cities and other high-cost locations, such as. resort areas, designated by the government.

Lodging Rates:

The Standard Rate for lodging for all locations without specific rates is $89 for 2015 and 2016. Use can use the GSA Per Diem Rates Look-Up tool to find lodging rates by state and city.

Applying the Rates:

Keep in mind, most taxpayers use a calendar year (January 1, through December 31). Therefore, the first three months of the government's fiscal year (October, November, and December) represent the last three months of the calendar year.

The per diem rates may be updated at the start of the government's fiscal year (October, November, and December). If the rates are updated for the government's new fiscal year, the per diem rates for October, November, and December may be different from the per diem rates for the previous nine months (January through September).

Because of the overlapping of the government's fiscal year with the calendar year, you may choose to:

  • Use the same rates that apply to the first nine months of the year to the last three months of the calendar.
  • Or, use the rates that apply to the first nine months of the calendar year (January through September) then use the updated rates that apply to the last three months of the calendar year (October, November, and December, which are the first three months of the government's fiscal year).

Trips in the last three months:

For trips you took in the last three months of the calendar year (October, November, and December), you have two options for applying the rates. Keep in mind, you must consistently use one of these options; you may not switch between options.

  • Option1: Use the rates in effect for the first nine months, or
  • Option 2: Use the revised rates that took effect October 1

The standard meal allowance does not apply to areas outside the continental United states (CONUS).

The Department of Defense establishes per diem rates for:

  • Alaska
  • Hawaii
  • Puerto Rico
  • American Samoa
  • Guam
  • Midway
  • Northern Mariana Islands
  • U.S. Virgin Islands
  • Wake Island
  • And other non-foreign areas outside the continental United States.
  • As well as travel to foreign countries - OCONUS (Outside the Continental United States)

The U.S. Department of State establishes per diem rates for all other foreign areas.

The U.S. General Services Administration (GSA) establishes the per diem rates for the lower 48 Continental United States (CONUS), which are the maximum allowances that federal employees are reimbursed for expenses incurred while on official travel.

TIP: If you keep records of your meal expenses and it turns out that your actual meal costs were less than your meal allowance, you can claim the higher allowance.

The 50% Deduction Limitation

If there is a business purpose for wining and dining business associates (i.e. potential future clients or customers, your accountant, attorney, etc.), you can generally deduct only 50% of your unreimbursed entertainment and meal-related expenses.

The 50% limit on meal and entertainment expenses applies to:

  • the actual costs method and the IRS standard meal allowance, and
  • the expense meets either the directly-related test or associated test, and
  • none of the exceptions discussed later apply.

The 50% limitation applies to meal and entertainment expenses incurred while traveling away from home or entertaining business associates in your own hometown.

If you're out of town on business and you dine alone, 50% of your unreimbursed meal costs are deductible.

If you stay at a hotel while traveling out of town on business and the hotel bill includes meal costs along with the room costs and other room-related costs, you must separate the meal costs and then apply the 50% deduction rule.

The 50% limit also applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. It also applies to the cost of meals included in deductible educational expenses.

Transportation Industry Workers

If you are subject to the Department of Transportation's hours of service limits, you can deduct 80% of your business-related meal and entertainment expenses. There are other exceptions to the 50% limitation (discussed below).

Self-employed persons and employees in the transportation industry may elect to claim a special M&IE rate. This avoids having to apply CONUS or OCONUS rates on a locality-by-locality basis.

Exceptions to the 50% Limit

Generally, business-related meal and entertainment expenses are subject to the 50% limit. However, your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions.

  1. Self-employed: If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met.
    • You have these expenses as an independent contractor.
    • Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.
    • You provide adequate records of these expenses to your customer or client.
    • Example.
      • You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. If the client can deduct the expenses, the client is subject to the 50% limit.
      • If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit.
  2. Advertising expenses: You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit.
  3. Sale of meals or entertainment: You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit.
  4. Charitable sports event: You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event.
  5. Individuals subject to “hours of service” limits (Transportation Industry Workers 80% limit): You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. The percentage is 80%. Individuals subject to the Department of Transportation's “hours of service” limits include the following persons.
    • Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
    • Interstate truck operators and bus drivers who are under Department of Transportation regulations.
    • Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations.
    • Certain merchant mariners who are under Coast Guard regulations.
  6. If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan.

Travel Expense Records You Must Keep

Even though you use the meal allowance, you must still keep records of time, place, and business purpose of your trip

 

File your personal and small business taxes (Schedule C)