As year-end approaches, mortgage companies are planning holiday celebrations, production and recognition trips, and social gatherings. For CEOs and CFOs, the evolving IRS rules for Meals & Entertainment (M&E) deductions mean it’s crucial to know what’s fully, partially, or not at all deductible. Proper categorization and documentation help maximize deductions and avoid costly mistakes at audit time.
Why M&E Deductions Matter
M&E expenses can attract IRS attention. Prioritizing accurate, timely documentation ensures better tax outcomes and keeps your organization ready for any exam.
Proper support for the expense must show the expense is a) ordinary and necessary, b) has a business connection, c) is not lavish or extravagant, d) has proper substantiation, and e) the taxpayer or a representative are present.
Best Practice: Hold short refresher trainings for accounting staff before year-end to keep compliance top of mind and to clean up trial balance categorizations ahead of financial statement audits and return preparation.
What’s 100% Deductible
- Company-Wide Employee Events: Holiday parties and firmwide gatherings are fully deductible if primarily for employees. If spouses are in attendance, deductibility is allowed only if they are employees, or the spousal portion is included as income through 1099 or W-2 reporting.
Best Practice: Use a consistent form or software to track the substantiation for every event. Substantiation should include (A) the amount of such expense or other item, (B) the time and place of the travel/event or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit.
What’s 50% Deductible
- Business Meals: When business is discussed with clients, prospects, or partners, 50% of costs are deductible.
- Travel and Meeting Meals: Employee meals during travel or business meetings.
- De minimis fringe benefit meals: Employee meals and snacks, provided infrequently and of minimal value that are administratively impracticable to track. These become non-deductible after 2025.
- On-Site Meals & Snacks: In 2025, these remain 50% deductible, but become non-deductible in 2026, so track carefully now.
Following substantiation rules still apply to limited deductions.
Best Practice: Categorize these expenses clearly in your general ledger as you incur them, not at year-end.
What’s Not Deductible
- Entertainment: Expenses for golf, concerts, sporting events, and similar entertainment—even if business is discussed—are non-deductible.
- Non-Employee/Guest Expenses: Costs for spouses or guests who aren’t employees, unless amounts are treated as compensation.
- Club Dues & Certain Tickets: These remain non-deductible.
- Charitable benefit events: If you pay a qualified organization more than FMV for the right to attend a charity ball, banquet, show, sporting event, or other benefit event, you can deduct only the amount that is more
than the value of the privileges or other benefits you receive.
Best Practice: Review these accounts quarterly for misclassifications. Errors caught early avoid examination headaches.
Documentation & Compliance
Robust documentation is your best examination defense. Keep the following records:
- Itemized receipts
- Attendee lists
- Clear business purpose notes
- Signed expense reports
Segregate expenses by deductibility category in your ledger. For guest costs that aren’t deductible, treat them as taxable compensation to ensure deductions are allowable.
Best Practice: Implement expense-reporting software that tags deduction categories at entry for consistent tracking.
Common Mistakes (and How to Avoid Them)
Common pitfalls are often simple but costly:
- Mislabeling entertainment as meals, or vice versa
- Lacking substantiation
- Not separating employee-focused and client-focused expenses
- Forgetting to report non-deductible guest costs as compensation (if deductions are desired)
- Using outdated deduction rates (such as assuming all restaurant meals are 100% deductible)
Even a single weak link, even one unsubstantiated expense, invites scrutiny. Deduction rates change, and old guidance can stick around in staff habits. Don’t let legacy practices cost your organization dollars.
Best Practice: At each quarter’s end, audit a sample of M&E expenses for documentation and categorization gaps, fixing issues before they stack up.
Planning Ahead: 2026 Changes
Next year brings a big change: on-site meals and snacks for employees and de minimis fringe benefit meals will no longer be deductible. Now is the time to track these expenses carefully and evaluate if benefit strategies need adjustment.
Best Practice: Ask your tax advisor to project the bottom-line impact of these changes so there are no surprises in 2026.
Year-End Compliance Checklist
- Sort expenses by category (100%, 50%, none)
- Gather documentation
- Confirm mapping to tax forms (Forms 1120/1065, W-2, 1099, etc.)
- Address any necessary fringe benefit/payroll reporting
- Review all with your advisor before filing
Best Practice: Collaborate closely with HR during these internal reviews. Accurate employee/guest data is essential for both tax and compliance.
Make the Most of Your M&E Deductions
Quick, careful organization now can help preserve deductions and reduce examination risk, especially with regards to M&E where scrutiny is at its highest. Because of the changes in deduction allowances, it’s important to ensure you approach meals, entertainment, and associated expenses with a fine-toothed comb, noting adjustments that must be made and nuances that might have otherwise been overlooked.
The Richey May Tax Advisory team can review 2025 ledgers, ensure return consistency, and strategize for coming changes. Bringing us in early delivers clarity—and peace of mind—when it counts most. Tax season can be a headache for many reasons, but it doesn’t need to be. There’s no reason for you to have to go into the fray of documentation and deductions alone.
