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CPAs Net

Understanding business meal and entertainment deduction rules

  
May 28, 2021
Payne, Nickles & Company


The last few years have afforded quite a few changes in how the IRS allows businesses to handle meal and entertainment costs in relation to their taxes. The 2018 Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business-related entertainment expenses. Since the pandemic, the IRS has temporarily changed the tax-deductible amount allowed for some business meals to encourage increased sales at restaurants. With the easing of restrictions, businesses may be considering company picnics for employee appreciation or starting up business lunches with clients again. 
 

With all of these changes, putting a system in place to accurately track business food and entertainment expenses becomes essential. Best practices should include requesting detailed receipts and separately tracking which costs fall under the 50 percent deduction, 100 percent deduction, or not deductible categories.
  

In addition to keeping excellent records, below are some additional things to keep in mind about the business meal and entertainment deduction rules, including a helpful chart highlighting the deduction category particular meal and entertainment expenses fall under.
  

 

Meal and entertainment expense changes
  

Under the TCJA, the IRS no longer allows businesses to deduct most entertainment expenses even if they were a cost of doing business. Food and beverage related to entertainment venues are only covered with detailed receipts separately stating the cost of the meal.
  

Another change from the TCJA is that spouse or guest meals are not covered from travel unless the business employs the person. So, if your spouse accompanies you on a work trip, their meals are not deductible for the business.
  

The Consolidated Appropriations Act of 2021 (CAA) has temporarily increased the deduction for business meals provided by restaurants to 100 percent for tax years 2021 and 2022. Not all meals are created equal, however. The 100 percent deduction is only available for meals provided by restaurants, which the IRS defines 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’s premises.” Prepackaged food from a grocery, specialty, or convenience store is not eligible for the 100% deduction and would be limited to a 50% deduction.
 

Also, note that the expenses must be considered ordinary (common and accepted for your business) or necessary (helpful and appropriate) and cannot be considered lavish or extravagant. An employee of the business or the taxpayer must be present during the meal, as well.
 
  

A quick guide to business meal deductions

 

Expense Category Deductible Amount Tax Code Reference
Company social events and facilities for employees (e.g., holiday parties, team-building events) 100% IRC Secs. 274(e)(4) and 274(n)(2)(A)
Meals and entertainment included in employee or non-employee compensation 100% IRC Secs. 274(e)(2) and (9)
Reimbursed expenses under an accountable plan 100% IRC Sec. 274(e)(3)
Meals and entertainment made available to the public 100% IRC Sec. 274(e)(7)
Meals and entertainment sold to customers 100% IRC Sec. 274(e)(8)
Business travel meals 50%
100% (1/1/2021 to 12/31/2022)*
IRC Secs. 274(e)(3) and 274(e)(9)
Client/customer business meals 50%
100% (1/1/2021 to 12/31/2022)*
Notice 2018-76
Business meeting meals 50%
100% (1/1/2021 to 12/31/2022)*
IRC Secs 274(e)(5), 274(k)(1), and 274(e)(6)
De minimis food and beverages provided in the workplace (e.g., bottled water, coffee, snacks) 50% IRC Sec 274(e)(1)
Meals provided for the convenience of the employer  50% (through 12/31/2025)
0% (on or after 1/1/2026)
IRC Sec. 274(n) and 274(o)
Employer-operated eating facilities 50% (through 12/31/2025)
0% (on or after 1/1/2026)
IRC Sec. 274(n) and 274(o)
Meals/beverages associated with entertainment activities when not separated stated on the receipt 0% Notice 2018-76
Personal, lavish, or extravagant meals/beverages in relation to the activity 0% IRC Secs. 274(k)(1) and 274(k)(2)
Entertainment without exception 0% IRC Secs. 274(a)(1) and 274(e)

*Meals are only deductible in the 2021 and 2022 tax years if provided by a restaurant, as defined by the IRS in the above article. 

 

If you need help establishing a system to better track expenses or seek clarification on whether certain expenses are tax-deductible, give our team of CPAs a call today.

 
 

419-625-4942             419-668-2552
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Treasury Circular 230 Disclosure

Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.