Tax reform changed the rules on business meals and entertainment.
Here’s a reminder of what McDonald’s Owner/Operators should know about the current tax laws regarding employee meals, business meals and entertainment expenses and how best to track them.
Employee meals are 100% deductible for income tax purposes. Examples of employee meals include meals provided for employees during their work shift.
A separate general ledger account called “Employee meals” needs to be maintained for this purpose. This expense is included under controllable expenses on your financial statements.
As a reminder, employee meals are considered a sale and applicable sales tax should be charged even if the sale is discounted and the cost to the employee is minimal. If the meal is provided to an employee free of charge, in some states it may be considered a sale and use tax would be due on the cost of the free meal.
Please note that an employee’s meals when attending McDonald’s training will fall into the employee meals category.
Business meals include meals that are “ordinary and necessary” and incurred in the course of business. These are meals where business is discussed.
Examples of these meals would be those with supplier partners such as an attorney, consultant or business contact. The meal must not be lavish or extravagant and the taxpayer or taxpayer’s employee must be present at the meal. Business meals are 50% deductible for income tax purposes.
A separate general ledger account titled “Business meals” needs to be maintained. This type of meal is included in General & Administrative expenses.
Entertainment expenses are no longer deductible for income tax purposes. Entertainment includes any activity generally considered to provide entertainment, amusement or recreation. Membership dues such as country club dues are also nondeductible.
Examples of entertainment expenses include tickets to sporting events and concerts as well as meals where business is not discussed. A separate general ledger account called “Entertainment” is needed and would also be included in General & Administrative expenses.
An important caveat to the business meal and entertainment deductibility rule relates to food or beverages that are provided during at an entertainment event. If the food or beverages were purchased separately or separately stated from the entertainment on the bill, invoice or receipt, the cost of the food or beverages can generally be deducted as a business meal expense. If not separately stated, the costs are not deductible.
Please contact us if you are unsure where an expense should be coded or need further clarification on this issue.