How and when to take a meal expense when you are an employee
Employees sometimes have business expenses. Typically, these are union dues, uniforms, education, and professional licensing, education, and insurance. It is rare for an employee to entertain clients without being reimbursed by the employer, but it is possible.
It is more likely for an employee to incur a meal expense while traveling for business. In this scenario, there is usually a reimbursement, but the reimbursement does not cover the full cost. Like the items listed above, any expense that is not reimbursed is a possible tax deduction. But that does not mean anything you eat or drink while at the seminar in New Orleans is business related! Those cute little bottles on the flight and in the mini-bar of your hotel room are not meals and do not count. A mid-afternoon ice cream, candy bars from the hotel store, and espresso in the lounge are also not meals. Meals are breakfast, lunch, and dinner. Skip breakfast and go drinking after class? Don’t try it: your documentation will out you.
Of course, extraordinary spending will not hold up under audit. This means, for example, if you find a way to spend $175 for a plate of eggs, and you are audited, the IRS is likely to disallow your meal, or at least a large portion of it.
Employees must follow the same rules as employers. The meal must have a business purpose. The cost must be documented. Additionally, if there is any reimbursement, the employee can only take a deduction for the portion of the meal (or other expense) that is not reimbursed. Finally, the meal is subject to the same 50% disallowance that employers and companies must use.
In order to take the deduction, meals need to be entered on Form 2106, Employee Business Expenses. Form 2106 provides a line-by-line listing, and shows you how to net out the reimbursement, and also how to calculate the 50% disallowance. The total from Form 2106 is carried to Schedule A, in the section at the bottom of Other Miscellaneous Deductions. There, it is combined with a few other items, but due to the 2% limitation, often amounts to a lot of work for no tax break. (More details on THAT in a future article.)
Some people try to enter the business expenses, including the meals, directly into the section at the bottom of Schedule A, but this is wrong. This is particularly wrong when there is a reimbursement or when meals are included!
When it comes to states, the treatment varies widely. For example, NJ does not allow any kind of employee business expense, but PA does.
Some employers simply provide a per diem and you don’t have to document the use. If the per diem is in line with the federal per diem, you don’t get a meal allowance for any amount spent over the per diem. If the per diem is less, you may take an allowance for the amount up to the federal limit.
If you are an employee who incurs business expenses, learn the rules! Talk with your employer in advance! What’s an acceptable cost for a business lunch? Who does your boss consider important enough to feed? How frequently will your boss allow this? What is the procedure for documentation? What is the timing for reimbursement? If you are not getting a 100% reimbursement, in light of the 2% limitation, check with your accountant to find out if the remaining portion is high enough to matter.
In my humble opinion, however, if your boss expects you to wine and dine the clients, your boss really needs to pick up the tab.