Tax Limitations on Meals and Entertainment Expense

The Internal Revenue Code limits the amount of tax deductions a taxpayer may take on meal and entertainment expenses. The law reduces the tax deduction to 50% of the taxpayer’s actual cost of the meal or entertainment expense. While meals for entertainment such as taking a customer to a fancy restaurant obviously fall into this category, the limitation also applies to meals connected with travel. For example if a bankruptcy attorney flies from Libertyville, Illinois to New York city to gather evidence for a trial, he will be subject to this rule. If he eats lunch at McDonalds during this trip, he will only be able to deduct half the price of his hamburger and fries.

The limitation does not apply to an employee, who is reimbursed for business related meals and entertainment by her employer. As long as proper records are kept in that situation, the employee actually ignores these transactions on her personal tax return. She does not take a deduction for the expenses, and she does not have to report the reimbursements as taxable income. Rather the employer may take a tax deduction for these meal and entertainment items as a business expense, and the employee will be subject to the 50% limitation.