The deductibility of meals and entertainment has long been a “hot topic” for business owners – and understandably so! Being able to deduct these potentially-significant marketing expenses can be a game changer for many small businesses.
The COVID-19 pandemic has occasioned many changes in the corporate sector and in US tax law, including the oft-asked question of the “meals and entertainment” tax rules. There have been some significant tax changes surrounding meals and entertainment deductibility.
The Tax Cuts and Jobs Act
(TCJA) of 2017 significantly changed deductions, expensing, depreciation, tax credits, etc. In 2018, Congress made further changes to meals and entertainment tax deductibles. The 2017 rule changes made business entertainment an entirely non-deductive expense while reducing meal tax deduction to 50%. But recently, that has changed somewhat.
Writing off your business’s meal and entertainment expenses can be confusing. Your meals and events now can be eligible for either 100% or 50% deductibility. However, whether they are 100% or 50% deductible depends on the purpose
of the meals and entertainment. Confused yet? You’re not alone.
Let’s dig in a little bit more and try to offer some clarity.
Changes to Meal and Entertainment Tax-Deductibility
Initially, the TCJA did not allow businesses to make any
deductions on entertainment and reduced the meal expense deduction to only 50 percent. Many business owners were up in arms about these changes (believe me! I heard about it directly from a lot of y’all!)
However, the Consolidated Appropriations Act
(CAA) of 2021 made some temporary additional changes to give the restaurant industry a boost, due in part at least to the hard times that many restaurants had fallen on as a result of the COVID-19 pandemic.
TCJA Changes in 2020
Then, TCJA made some changes to its regulations in October 2020. The final regulations act as a guide for businesses on the treatment of meals and entertainment tax deductions. The notice by IRS clearly states that a meal will only qualify for a full tax deduction if it is served on an occasion that has nothing to do with entertainment.
If you have a meal at an entertainment event, this meal will only be eligible for a 50 percent deduction. However, the invoice must mention food and beverages separately. Furthermore, you have to ensure that the meal is not too extravagant.
In addition, the taxpayer must be present at the time of serving in order for the meal to qualify as deductible. The “present” person can be a business owner or an employee of the taxpaying entity. Luckily, any incidental expenses associated with meals (such as taxes, tips, and delivery fees) are also deductible expenses, if the meal is deductible.
The purpose of temporary changes to CAA is to offer added benefits to the businesses and their employees for the purpose of economic stimulus. However, you must remember that the 100 percent meal tax deductibility is only applicable until December 31, 2022 – although, of course, Congress may decide to change the law to extend the benefit yet again at any time.
So if you are a business, it’s important that you benefit from these temporary reforms allowing 100 percent deductions. If you are unsure, it is best to hire a tax expert or speak to your accountant and maximize your benefits.
2022 Meal and Entertainment Tax Deduction – Quick Reference Chart
On December 27, 2020, the U.S government signed the Consolidated Appropriations Act to make further changes to meal and entertainment deductions. For instance, businesses will be eligible for a 100% deduction on food and beverages purchased from restaurants in 2021 and 2022.
The chart below will hopefully help you understand these changes better.
||Percent of Deduction allowed
|Client entertainment such as golf games, concert tickets
||No deduction allowed
|Meals with business partners or clients
||50% deductible – this can be 100% deductible if you purchase your meals from a restaurant
|Office meals and snacks
||50% deductible – this can be 100% deductible if you purchase your meals from a restaurant
|Meals and entertainment that are included in the compensation
So, if you are a business owner having dinner with a client at a restaurant, this meal will be 100% tax-deductible (at least for 2022!). On the other hand, if you are serving lunch to a client but purchased the meal from a grocery store, this meal will be eligible for 50% tax-deductible (again, for 2022 or until the law changes again).
The Non-Deductible Expenses
First, let’s get the non-deductible expenses out of the way. Some certain items and events are not eligible for any tax deductions under any circumstances, and these are:
- Meals that you have with a client or business partner during entertainment
- Sporting event tickets
- Club memberships as well as club-related expenses
- Transportation expenses associated with a business meal, even if the meal was at a restaurant
100 Percent Deductible Expenses
As a business, you can enjoy 100 percent meal and entertainment tax deductibles under certain other circumstances as well, such as
- Company Parties: meals are 100% deductible if you are serving them at a company-wide party (such as a Christmas Party or an Employee Appreciation Party, etc)
- Marketing To The Public: food and drinks provided to the public free of charge, for example at a marketing event for prospective clients are also 100% deductible
- Cafeterias and Employer-Provided Food: food is 100% deductible if it is a part of taxable compensation for the employees (such as an employer-sponsored meal program or cafeteria for employees); the catch is that it must also be included on the employee’s W-2
50 Percent Deductible Meal Expenses
There are many meal expenses with 50% tax deductibility. Some of the most common scenarios eligible for the 50 % deductible level are:
- When you have a meal with a client while discussing work (however, the dinner must not be “lavish” or else the deduction may be disallowed)
- Meals are served to the employees at a conference when the meal price is comparatively more than the conference’s ticket price.
- Employees having a meal while traveling for work.
- Treating a team of employees by taking them out for a meal. However, if you are taking out more than 50 percent of your workforce for a meal, this meal will be eligible for 100 percent tax-deductible (recall the “company party” rules above).
- Food served during a board meeting.
- Dinner that you provide for employees working late.
Restaurant Meals Modifications
The restaurant industry took the biggest economic hit during the COVID-19 pandemic. Once again, the credit for these amendments or modifications goes to the CAA. As of 2022, for all the meal costs incurred or paid during 2021 and 2022, businesses may be eligible to claim a 100 percent deduction when purchasing meals from restaurants.
This means all meals eligible for a 50 percent deduction qualify for 100 percent tax deductibility during 2021 and 2022. However, these temporary tax deduction measures are only applicable for meals. Entertainment expenses are still
The Inland Revenue Service (IRS) published Notice 2021-25
dealing with the 100% meal deduction issue. Both notices provide businesses with additional guidelines on applying a 100 percent meal tax deduction. If you are looking for additional guidance on the topic, these two notices are a great place to start.
And keep in mind that if your meal falls short of the criteria in the IRS Notices, all is not lost. Meals that do not qualify for a full 100 percent deduction may still be eligible for 50 percent deductions.
What Qualifies as a Restaurant?
For a meal to be 100 percent deductible, it has to be purchased from “a restaurant”. And while historically the meaning of that term is obvious, in recent years it has become a little bit more slippery, between in-house cafeterias, coffee bars that serve food, food trucks, travelling chefs, pop up restaurants, movie theaters that serve dinner and drinks, takeout-only food stands, food delivery services, ready-made meal prep services, and many many more.
So which of these is a restaurant and which isn’t?
Fortunately, Notice 2021-25 by the IRS defines a restaurant.
A restaurant is a business that cooks and sells food as well as beverages to its diners for immediate consumption. However, it does not matter whether the food preparing business serves the food on the premise or as a takeaway service.
A business is not a restaurant if it sells prepackaged food that is not for immediate consumption. These include convenience stores, grocery stores, liquor stores, specialty food stands, vending machines, and drug stores.
What if you are a business with an in-house cafeteria – your own eating facility that cooks and serves food? In that case, your food will not be eligible for 100 percent deductibility. This applies to on-site food facilities contracted out to or operated by third-party food preparers as well.
On the other hand, if you buy a meal from a restaurant and bring it to the office to eat, it is eligible for a 100 percent tax deduction. Similarly, if you are having a meal with a client within the restaurant’s premises, it also qualifies for maximum tax deductibility.
According to IRS Notice 2021-63, as a taxpayer, your business can treat meal allowance as 100 percent deductible. However, you must meet the pre-requisite to substantiate this expense, or the expense qualifies for a 100 percent temporary meal deduction.
Many work-associated meals can be eligible for 50 percent or 100 percent tax deductibility, if you will just do your homework. And while may be some exceptions, it will benefit your business to learn more about these rules (and of course, always save your receipts!)
Also, always remember that none of the TCJA rules allow entertainment to be eligible for a tax deduction.
If you are a business looking for advice on meals and entertainment tax deductions, Ryan Reiffert can help you. He is a lawyer with extensive knowledge about business, estate planning, and related laws in the state of Texas.
at (210) 817-4388 to schedule an initial consultation.