Business Meal Deductions
Business Meal Deductions
Did you know that business meal deductions can apply to 100% of the total cost?
In an effort to assist this industry, the Consolidated Appropriations Act of 2021 introduced a 100% business meal deduction. This temporarily increases the deduction of expenses that are paid or incurred for food or beverages provided by a restaurant to 100% of the costs. The temporary increase is effective for the years 2021 and 2022.
The new provision creates a temporary but meaningful tax incentive to spend more on an industry that has been significantly impacted by the COVID-19 pandemic. Thus, business owners can write off meals and entertainment at full cost (formerly 50%) for the years 2021 and 2022.
New Business Meal Rules
To qualify for 100% deduction, your deductible business meals must be:
- Ordinary and necessary business expenses
- Not lavish or extravagant meals
- You must be present at the meal and a bona fide business discussion must take place.
Again, it is important to take note that the law requires that a restaurant must provide the food and beverages. Keep receipts.
What qualifies as a restaurant?
According to the guidance released by the IRS on April 8, 2021, the Notice 2021-25 defines a restaurant as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business premises. This means takeout, delivery tips, fees and sales tax also qualify for the temporary 100% deduction.
Excluded from the definition of a restaurant are those establishments that primarily sell pre-packaged food or beverages not for immediate consumption, such as: grocery stores, specialty food stores, wine or liquor stores, drug stores, convenience stores, newsstands, or vending machines or kiosks.
Additionally, (1) any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income as a convenience of the employer; and (2) any employer-operated eating facility by a third party under contract with the employer are also excluded from the definition of a restaurant. The 50% deduction limitation continues to apply to these establishments.
What about food bought at an entertainment event?
Expenses related to business entertainment, amusement or recreation activities are no longer eligible for a 50% deduction starting 2018. Taxpayers may, however, still deduct business expenses related to food and beverages in conjunction with entertainment provided that (1) the food or beverages provided at or during an entertainment activity are purchased separately from the entertainment, or (2) the cost of the food or beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts.
What about travel meals?
Travel meals qualify for the 100% deduction as long as the taxpayer or employee of the taxpayer is present at the meal and it is for business travel reasons. However, no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business trips unless they are also employees of the business and are on the trip for business purposes.
Some Little-known Deductibles
Before the TCJA of 2017, the following tax-law exceptions allowed 100% deductibility for eligible meal and entertainment expenses. Your business can deduct 100% of meal and entertainment expenses that are:
- reported as taxable compensation to recipient employees;
- incurred for recreational, social or similar activities primarily for the benefit of employees;
- made available to the general public;
- sold to customers for full value, including the cost of related facilities; and
- reported as non-taxable income to a non-employee recipient on a Form 1099.
Takeaways
Business owners are encouraged by the Congress through this temporary tax-incentive to spend on business meals and beverages to resuscitate the economy. So the next time you meet with a client or think of throwing a party for your employees, remember that 100% of those expenses are now tax deductible. Help your favorite establishments survive these trying times, and extend their lifeline for years to come. So party on!
If you would like to chat more about this and other deductions, schedule a free consultation.
