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Are Meals and Entertainment Tax Deductible? 2022 Brings More Tax Changes
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.
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).
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.Expenses | 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 |
Company’s party | 100% deductible |
Meals and entertainment that are included in the compensation | 100% deductible |
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.