One of the worst surprises a business owner can face is to find out they’ve taken out more money from their business as a distribution or draw than what they thought they took out. One of the hidden ways this number creeps up is from meal expenses. Only 50% of the cost of business meals is deductible for tax purposes. So you spend $50 at a restaurant with a potential customer, and $25 of that ticket gets categorized as money you took out of the business over the year. Do this often enough and it really adds up. Even if you take 10 people out to dinner, it’s still only 50% of the bill that is expensible and you get taxed on the remaining portion.
A point of frequent confusion is that many people try to expense their own lunches or other meals as business expenses. Here’s an example: part of your business involves making deliveries. So while you’re out driving the delivery van, you get hungry and swing through the McDonald’s drive through for lunch for yourself. This is not a business expense. Buying the $1.39 drink at the gas station while you fill up is not a meal expense.
Of course, there are exceptions. If you are travelling out of town for business purposes, your meals will be deductible (with certain limits) on travel days and on days you are conducting business. If instead of buying the $1.39 drink at the gas station, you buy a case of drinks and take them back to the office to share with your staff, the case of drinks is deductible.
The main point here is to be aware that you are probably taking money out of your business when you expense business meals, and will end up getting taxed on it.