Why Your Employees' Meals & Friday Pizza Parties Might Not Be Tax-Deductible

Meal and entertainment costs have been a topic of discussion since 2017 due to something called the Tax Cuts and Jobs Act, and if you're paying for your team's lunches while they're doing interstate moves or having weekly Friday pizza parties, you're likely not getting the expense legally that you think you are.

So then, what is an allowable meal and entertainment cost? IRC Section 274 outlines it for us, and we use that section for guidance on how to make sure we get the benefit of the expense.

There's three main conditions that we have to work through to make sure that meal & entertainment costs are allowable.

1. All employees must be included in the meal or event.

In order for this expense to be fully deductible, the meal or event must be for "rank and file" employees. So that means every employee, not just C-suite level employees, not just movers or laborers, not just salesmen. It has to include everyone.

2. It must have a social or recreational purpose.

Think, for example, company Christmas Party or annual company picnic. These types of events are specifically social & recreational events. So once again, paying for your team's meals when they're out on a job or providing bagels at your Monday morning sales meetings would NOT be deductible because those wouldn't be considered company events with a social or recreational purpose. (So, if you are paying for that, just know you're only able to deduct 50% of the cost.)

And finally,

3. You must have documentation to support your claim that both of the previous conditions are met.

You have to be able to prove that the event was for every employee, and that it was also for social or recreational purposes. Even if both of the previous conditions are met, without documentaion, it won't hold up. The ONLY exception to this rule is if you’re a full-time fisherman which is doubtful if you're a moving company owner reading this.

So, that’s the test. If all three of those conditions are true and present, then the expense is most likely an allowable Meals & Entertainment Expense.

However, what most moving companies are doing wrong is that they’re paying for their team member’s meals when they do interstate moves or for a salesman when they're out doing in-home estimates and such, using the company credit card. This IS NOT an allowable meal expense, and as the moving company owner, you’re only able to deduct 50% of that meal cost from your Taxable Net Income, not the whole thing.

And yet, here's some good news: you can still provide your employees with reimbursement for meals while they're out of state or out of the office through a Taxable Per Diem. This means that, through their payroll, they receive a per diem to cover the meal, though it is a taxable earning to them. So they have to pay tax on the money they receive from you for those meal costs, just like they do for their regular payroll wages.

So as the company owner, this makes that meal cost non-taxable to you, and you can write off the whole expense.

If you’re NOT paying out those expenses like this, you’re only receiving a 50% benefit of the expense for those meal costs.

So, going forward, stop paying for your employee meals unless it's for a company event where all employees are included and you can prove it with proper documentation. And if you still want to offer the benefit of paying for employees' meals while they’re out of the office, the taxable per diem is the best way to do it so you can recieve the full benefit of the deduction.