We have had a lot of questions from our clients recently related to meals and mileage and reimbursing employees, so this blog post is dedicated to trying to clearly explain how this business topic works.
Any food and beverage and travel expenses including mileage that are directly related or associated with the active conduct of a trade or business are allowed to be deducted as business expenses for tax purposes to the extent that they are not lavish and extravagant.
If these expenses are covered by an “Accountable Plan” they do not have to be reported as taxable income on employees’ paychecks. An “Accountable Plan” means that employees are required to turn in receipts and fill out an expense report within a reasonable time, generally 30 days after the expense is incurred. This applies whether an employer gives an advance, pays a per diem, or reimburses employee paid expenses. If an employee gives an advance, the employee needs to return the unused portion of the advance along with the expense report and receipts. Under an “Accountable Plan”, the employer does not report the expense on the employee’s W2 as taxable income.
If per diems are used under an “Accountable Plan”, they must be equal to or less than the IRS allowable per diem or the difference must be included as taxable income to the employee. If you use per diems, let us know and we will provide you with the current rates. For meals while traveling, per diems need to be pro-rated by a consistent, reasonable method for departure and arrival days because they are less than 24 hours for business purposes.
If the employer does not have an “Accountable Plan” (i.e., does not require employees to turn in expense reports and receipts to document the reimbursement or per diem), then the advance or per diem needs to be included as taxable income on the employee’s W2 and then the employee can claim the expense on their taxes.
When recording mileage, commuting miles (miles from home to the main place of business and back) are not allowed as a business expense. If commuting miles are reimbursed, then they must be included as taxable income on the employee’s W2. The employee cannot claim the expense on their taxes.
For business meals, some meals are 50% deductible and some meals are 100% deductible. We recommend setting up two separate meals accounts on your books to note the difference, such as Meals-50% deductible and Meals-100% deductible and to record the expenses under the correct category as they occur. Most meals that are on an expense report fall under the 50% category.
The meals that are 100% deductible are:
1. Recreational expenses primarily for employees who are not highly compensated, such as the business holiday party or the company picnic
2. Office snacks provided to employees at the office
3. Occasional meals provided on the employer’s premises to more than half of the employees for the convenience of the employer, meaning meals provided to employees to keep them working late or on weekends for the employer’s convenience (i.e., supper money).
4. Meal expenses (or goods, services, and facilities) made available to the public, usually for advertising and promotional purposes such as an Open House.
5. Meals for which the business is reimbursed for the expense
6. Meal expenses includible in income of persons who are not employees
Meals that are 50% deductible are:
1. Meals directly related to business meetings of employees, stockholders, agents, and directors
2. Office meetings and partner meetings
3. Meals with clients, customers, and vendors that will benefit the business
4. Meals while on business travel status (this requires an overnight stay).
5. Meals while attending a business seminar, convention, or any other form of meeting. Note: a meal during the course of a business day that does not have a business purpose (i.e., driving through McDonalds while on a day of sales calls within your normal territory) is not an allowable tax deduction.
We recommend that all employers adopt an Accountable Plan. This simply requires developing a procedure for reimbursing employees for the above expenses. We have a sample expense report that you can adapt to your business if needed.
Thanks goes out to Julie Kim from Watkins-Meegan for writing the most user friendly explanation of 50% v. 100% deductible meals that I have seen! Some of the words in this blog are hers.