Drinking a cafe miel (a latte with honey and cinnamon) at a local coffee shop has become one of my favorite things about working for myself. Sometimes I go there just to get out of the house. Other times I’m meeting with prospective clients or networking with local business owners. The purpose of my coffee purchase will determine whether and how much I can deduct as a business expense on my tax return.
But first, a little background about business expenses. In order to offset income and deduct business expenses, they need to be ordinary and necessary for doing business. An ordinary expense is common to others in your industry. A necessary expense is one that is appropriate for the business.
Keep in mind that if some of these expenses are also used for personal use (like Internet access) you should only deduct the portion that actually relates to your business. And keep proper documentation of your business expenses for when tax time rolls around!
When it comes to deducting meals and entertainment, the IRS guidance is a bit more nuanced. In general, 50% of meals and entertainment expenses are deductible. But depending on the purpose of your cup of coffee or trip to the coffee shop, you might be able to deduct 100% or a whole lotta nothing.
No Deduction
I buy a cup of coffee and drink it at home or in the office. Same with buying a cup of coffee while working by yourself from a coffee shop. No, you can’t try to recategorize the expense as “Internet” since you’re using the free WiFi.
50% Deductible Business Expense
I buy a cup of coffee while out of town and traveling overnight for business. [Pro tip: don’t forget to track your mileage while traveling. I love using MileIQ (affiliate link) to track my business miles driven. You’ll get 20% off an annual plan using that link.]
I buy a cup of coffee while meeting with current or prospective clients. Or I buy a cup of coffee with networking with others in my industry. In both cases, there should be substantial business discussion.
50% Deductible Non-Reimbursed Employee Expense
Same as above, but now I’m an employee and my employer requires me to supply food in my business meetings, but doesn’t reimburse me for it. (While this is still 50% deductible, it’s a miscellaneous itemized deduction and won’t begin to count until you’ve crossed the threshold of 2% of your adjusted gross income.)
100% Deductible Business Expense
I buy lunch for attendees of a business presentation or training (to obviously increase productivity and efficiency). Buying coffee and bagels could be a 100% deductible business expense if the meeting is held super early in the morning.
I buy coffee and donuts as a promotional item for employees and the general public to be enjoyed at a trade expo, farmer’s market, the lobby of our office, etc.
100% Deductible Non-Reimbursed Employee Expense
Same as above, but now I’m an employee and my employer requires me to supply food in my business meetings, but doesn’t reimburse me for it. (While this is still 50% deductible, it’s a miscellaneous itemized deduction and won’t begin to count until you’ve crossed the threshold of 2% of your adjusted gross income.)
100% Deductible Personally
I buy a box of coffee and donate them to the church bake sale. This is an charitable contribution and included on Schedule A as an itemized deduction. Even if your business purchased and donated the coffee, it would still pass through to the members or shareholders.
100% Deductible as COGS
I operate a bakery and buy coffee to resell.
100% Deductible as an Ordinary and Necessary Business Expense
I buy a cup of coffee to use as a prop during a tax talk where I discuss the meals and entertainment deduction.
I buy a cup of coffee to use as a prop during a photo shoot.
I write a blog about coffee and purchase coffee to then review on my blog.
Up to $25 per client per year as a client gift
I buy a gift box for my coffee loving client.
100% Deductible as an Entertainment Expense
I host an employee appreciation event at a fancy coffee shop
100% Deductible as an Office Expense
Coffee is purchased for the break room.
Thanks to Mike Russo for inspiring this post.
