In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, cancelling deductions for a majority of business-related entertainment expenses. This meant taking clients out for lunch, a round of golf or to a baseball game could no longer be considered a deduction. Not specifically outlined in the law were meals, snacks and beverages that accompany business entertainment activities.
However, in December of 2020, the Consolidated Appropriation Act (CAA) was signed and temporarily increased the deduction for certain business-related meal expenses. This has left many business owners unsure of what can and cannot be deducted along with how much. Here is a breakdown of what can be included for a deduction.
What Qualifies for 100% Deduction?
Previously, business meals at restaurants were limited to a 50% deduction. Now, the CAA will allow business-related meals and beverages provided by restaurants to be 100% deductible by taxpayers. This new law is for expenses incurred in 2021 and 2022.
In April, the IRS released guidance in Notice 2021-25 defining restaurants for this tax break as “a business that prepares and sells food or beverages to retail customers for immediate consumption regardless of whether it was consumed on/off the premises.” This excludes grocery and convenience stores who sell prepackaged food. Employers also cannot treat employer-operated eating facilities, whether operated by a third party under contract with the employer or not, as a restaurant.
Definitions and Treatments Pre-CAA Regulations Provide Guidance
Even though the CAA has now temporarily changed the old rules from 50% to 100% for 2021 and 2022, the law still provides guidance on relevant issues such as:
Defining Food and Beverage Costs
All food or beverage items, including meals and snacks, as well as delivery fees, tips and sales tax.
Treatment of Food and Beverages Provided with Entertainment
“Entertainment” includes food or beverages only if they are provided during or at an entertainment activity as long as the cost is not separately stated.
For the cost of food or beverages to be deductible during an entertainment activity, they must be purchased separately from entertainment or stated separately on a bill, invoice or receipt, which reflects the approximate value of items or the selling price if they were purchased separately from entertainment. If not, the entire cost is a nondeductible entertainment expense for the taxpayer.
Treatment of Business Meals
A deduction for business-related food or beverages is allowed only if the following parameters are met: the expense isn’t excessive under the circumstances; the taxpayer or the taxpayer’s employee is present at the time of food or beverages and they are provided to the taxpayer or business associate. A business associate is defined as a client, agent, partner, professional advisor or employee, whether established or prospective.
Treatment of Meals While Traveling on Business
Under the final regulations, long-standing rules for substantiating meal expenses still apply and can be deductible. This rule reiterates that no deductions are allowed for meal expenses for spouses, dependents or other individuals accompanying the taxpayer on business travel, as well as accompanying an officer or employee of the taxpayer on business travel, unless the expenses would be deductible by the individual, spouse or dependent. For instance, if the taxpayer’s spouse worked in the unincorporated business and accompanied the taxpayer for business reasons, then meal expenses would be deductible.
The new law for 2021 and 2022 makes all meals provided by restaurants while traveling for business 100% deductible.
There are other circumstances in which your business can deduct 100% of the cost of food and beverages. Contact your BSSF tax advisor if you would like more information or have any questions.
Disclaimer: Information provided by Brown Schultz Sheridan & Fritz (BSSF) as part of this blog post is intended for reference and information only. As the information is designed solely to provide guidance, and is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations, responding to such inquiries does NOT create a professional relationship between BSSF and the reader and should not be interpreted as such.
Although BSSF has made every reasonable effort to ensure that the information provided is accurate, BSSF makes no warranties, expressed or implied, on the information provided. The reader accepts the information as is and assumes all responsibility for the use of such information.