Tim’s Tax Time

Yep, You Can Deduct Your Side Hustle Meal

Well, you can in certain circumstances. And it likely won’t save you much money.

I love that I have a side hustle where I can write. It gives me a creative outlet and helps establish my personal brand.

There’s something else ALMOST as enjoyable about having a side hustle:

Tax deductions!

Yeah, I know, I’m weird like that. But after over a decade figuring out deductions for clients, I like it when I can take them myself, something the W-2 job doesn’t let me do.

So, from time to time, I write a bit about the kind of deduction that a side hustler like me might be able to take when filling out that annual 1040.

(Sorry, non-US filers, I can’t do much for you)

Today, we’re talking about the most delicious deduction of all.

Meals!

[I’m sure my daughter is groaning somewhere as I write this]

You have to eat to live. That’s a normal part of life, a typical personal expense. And as I drilled into my tax students shortly before writing this, personal expenses are NOT deductible except for in a very narrow band of activities that we have (somewhat randomly) decided are in the nation’s best interest.

Eating, unfortunately, is not one of those.

That means that if you want to deduct your food expense, you have to make the food specifically related to your business.

And, yes, as long as your side gig isn’t classified as a hobby*, meals do count.

Find Local Friends, Take Them Out, Talk Shop

If you want to make the government cover part of your food bill, your meal has to be work related. Which usually means eating with clients or potential clients.

For an online writer, this likely isn’t a common activity. That’s even before factoring in the still lingering COVID hot spots that put in-person dining at risk.

Still, almost anyone with a side hustle can take this deduction. All you need to do is find people some other side hustlers or indiepreneurs in your community, take them to lunch and talk shop. There’s always the possibility that you could get more work this way. We love pushing online marketing, but there’s still a huge market for face to face networking.

Deductions Don’t Make Things Free

In the tax world, every now and then I’ll hear someone offer to buy food with a comment like, “Don’t worry, it’s deductible.”

Alright right then! I rarely say no to a meal.

Just remember that this meal deduction doesn’t make the food free. This isn’t a blank check from Uncle Sam. It just reduces your year end tax bill by your tax rate.

Plus, for the meals deduction, there’s the haircut. I know talking about meals and haircuts in the same sentence can be nightmare inducing (SIDE NOTE: I lived in an apartment with a barbershop and a sandwich shop next door, and I could never bring myself to try the food for fear of the hair), but in this case, the term “haircut” is a dumb term that accountants throw around.

It means your meals deduction is limited to 50% of the expense.

Why 50%? I don’t know. I don’t understand most of the decisions coming out of Washington.

Anyway, in practice this means that when you fill out your business tax return, you only report HALF of the meals expense as a deduction.

Meals Deduction Saves Money…But Not Much

All the chat of haircuts and deductions brings us to the most important part of this conversation: actual money saved.

Let’s use an example to show how this works.

You take a client to a nice steak dinner at Shanahan’s (feel free to take me). You’re cheap, so it ONLY costs you $200.

With the haircut, your meal deduction is $100. Which I think science tells us is bigger than $0, so will likely lower your year end tax bill.

How does that translate to money in your pocket?

The most beneficial scenario will be if you’re in the top tax bracket. As of this writing, that would be 37% Federal and around 10% if you’re in a high tax place like California. Throw in the Self Employment tax of about 15% and that means 62% of every dollar you make at that top bracket is going to the government.

If that’s you, the $200 meals deduction turns into a $62 reduction on your tax bill. That’s REAL money. It means your $200 steak dinner actually cost $138, a 31% discount on your bill. Not too bad.

But I’m guessing you don’t have that 62% tax rate. It’s probably more like 12% to 24% federal, and 5% state. Oh, and that 15% self employment tax.

Let’s work through that math again.

12% + 5% + 15% = 32%, we end up with $100 x 32% = $32 deduction.

Now you’re looking more like a 16% discount on that steak dinner. Not bad, but definitely more in the “a nice coupon in the weekly ValuPak” range.

And if you have a lower tax rate? The savings go down more, potentially to zero.

Business Purpose First

I like going through this illustration of deductions from time to time. I can’t tell you how many times I’ve heard some variation of “well, it’s deductible, so I’ll buy it.”

It may be deductible…but that’s not some magic government wand to make it free. You’re getting a reduction on your taxes, which, depending on your tax rate, may be quite small.

What does this mean for the meals deduction? Or any deduction, really? It means decide from a BUSINESS perspective if taking that client to Shanahan’s is the right move. If it is, let the tax consequences follow.

So, back to the main question: should you find people in the community to take to coffee or lunch or whatever to take advantage of this deduction?

Not for the deduction, no. But it’s still not a bad idea to do to connect with your community and spread word of your work.

Getting that deduction is just a side benefit. As a tax nerd, that makes me pretty excited to take people to the local Panera.

SIDE NOTE: Theoretically, even this 50% haircut is scheduled to go away after 2025, making the meals deduction a big fat goose egg for all. It’ll be interesting to see how hard the cattle industry pushes to keep the deduction on the books. Gotta sell those steaks!

Are you in the US working freelance, starting up a side hustle, or working your own independent entrepreneurial venture? Then great news! I have a free, 6 day course covering all the business basics you need to know, from organization to tax! Sign up for it here.