IRS Meal Allowance
Generally, your meal costs are considered a personal expense and are not deductible. For example, if you go out to lunch and there is no business purpose other than to simply get something to eat, the cost of your lunch is a personal expense and is not deductible.
To be deductible, your meal costs must be business-related. If you take a client out to lunch, the cost of the meal must be an ordinary and necessary business expense (not lavish or extravagant) and must be either:
- Directly related to the active conduct of your business ("directly-related" test). or
- Directly preceding or following a substantial and bona fide business discussion on a subject that is associated with the active conduct of your business ("associated" test).
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.
Business associates may include either established or prospective employees, agents, your accountant, business partners, your attorney, your banker, and suppliers.
If you're out of town on business and you dine alone, your meal costs are deductible.
There are two ways to deduct meal costs:
- Actual costs
- The IRS standard meal allowance (see below)
The 50% Deduction Limitation
Regardless of the method you use to deduct meal expenses, actual costs or the IRS standard meal allowance, the 50% limitation applies to both methods. In addition, 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 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.
Accountable Plan: If you're an employee and get reimbursed by your employer under an accountable plan, the reimbursement is tax free even though it covers 100% of you meal costs.
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.
- 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.
- 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.
- 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.
- 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.
- Individuals subject to “hours of service” limits: 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.
- 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.
Standard Meal Allowance
M&IE Rates (Meals and Incidental Expenses):
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 2015 fiscal year runs October 1, 2014 through September 30, 2015.
The table for the M&IE rates has six tiers ranging from $46 to $71 for the lower 48 continental United States. 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. The M&IE rate for your location will be one of the six tiers listed in this table.
Higher rates apply in major cities and other high-cost locations, such as. resort areas, designated by the government.
There are about 3,000 counties in the Continental United States (CONUS). Therefore, if you choose to use the per diem rates for meals rather than your actual expenses, check the per diem rate table to find the correct rate for your primary destination.
The standard lodging rate is $83 per day. Certain locations within a state may have higher daily lodging rates. In addition, the daily lodging rate may increase during certain months of the year. For example, in Sedona, Arizona, in the city limits, the daily lodging rate for January and February 2014 is $123 and increases to $147 per day during March and April.
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 (Oct., Nov. Dec.). 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 through December).
Trips in the last three months:
For trips you took in the last three months of the calendar year (October, November, 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 none 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:
- Puerto Rico
- American Samoa
- 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.
The M&IE allowance is broken down into:
The basic and high-cost area rates are determined by U.S. General Services Administration.
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 still claim the higher allowance.
Employees may not use the M&IE allowance if:
- The employer is a relative (parent, brother, child, grand child, grand parent) or
- The employee owns over 10% of the employer's outstanding stock.
Travel Expense Records You Must Keep
Even though you use the meal allowance, you must still keep records of:
- Business purpose of trip
Transportation Industry Workers
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.
OCONUS (Outside the Continental United States)
Different rates apply for travel in Alaska, Hawaii, Puerto Rico, and U.S. possessions, as well as travel to foreign countries. Get the rates from the U.S. General Services Administration website.