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.
In December of 2020, the Consolidated Appropriation Act (CAA) was signed and temporarily increased the deduction for certain business-related meal expenses. However, many business owners are still unsure of what can and cannot be deducted along with how much. Below 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 applies to food and beverage purchases that are paid for or billed after December 31, 2022, and before January 1, 2023.
In April of 2021, 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 as a restaurant, even if it is operated by a third party under contract with the employer.
The IRS also issued Notice 2021-63, defining how the 100% temporary business deduction for food or beverages from restaurants applies to taxpayers applying the rules of Revenue Procedure 2019-48 for using daily allowance rates.
Businesses are encouraged by the IRS to take advantage of this tax benefit when they file their 2022 federal income tax return.
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.