Deductible Meals

• The IRS allows you to deduct the cost of meals and the tips you leave restaurant wait staff in only two situations. You can only claim a meal and tip deduction when you are traveling away from home for business purposes and it's necessary for you to stay overnight and when there is a business purpose for dining out, regardless of the location. For example, if you take a prospective client out to a dinner to discuss a possible business deal, there is a substantial business purpose. However, if the client is also a friend and you don't spend any time discussing business during the meal, you cannot deduct any of the meals you purchase or the tips you leave.
  
  

Extravagant Meals

• The IRS can disallow the meal and tip deduction you report on Schedule C if it is overly luxurious or extravagant. Making this determination is based on the facts and circumstances; the IRS will not treat your deduction as extravagant just because you choose to dine at an expensive restaurant. The focus is on whether the meal expense was appropriate. For example, if you take a prospective client to a high-end restaurant, the expense may be appropriate if you are close to closing a deal for a substantial amount of money. However, if you spend $1,000 to take a low- level employee to lunch, it's most likely inappropriate and nondeductible.
  
  

Calculating the Deduction

• You can calculate your meal and tip deduction in two ways. If you retain all of your receipts for the price of every meal and the amount of each tip you can deduct, you are free to report your actual expenses on Schedule C. You also have the option of using the standard meal allowance. The standard meal allowance allows you to claim a fixed daily amount that is different depending on the geographic location of your meal purchases. Using the allowance doesn't require you to retain receipts and is even available if you actually spend less than the daily allowance.
  
  

Reducing Meal Deduction

• When you deduct meals and tips on your Schedule C, the IRS only allows you to deduct 50 percent of your costs, regardless of whether you use the actual cost or standard allowance. The IRS does provide one exception for self-employed taxpayers. If you incur the meal and tip expenses as an independent contractor, your customer or client provides you with a meal and tip allowance for which it promises to reimburse you and you provide adequate records or receipts to the client, then you can deduct 100 percent of the cost.