New Rules For Deducting Meal and Entertainment Expenses
Taking your clients out to dinner or to a sporting event can be a great way to get to know the people with whom you are doing business and help you develop a closer relationship. Plus, business-related meals and entertainment can be a legitimate business expense (with some exceptions) that you can deduct from your company’s income taxes. That said, the rules for deducting meal and entertainment expenses from your taxes have changed quite a bit over the last few years. And these changes have made understanding exactly what you can (and cannot) write off on your tax return pretty confusing. In some circumstances, for example, a business-related meal is 100% deductible, while in others, the same meal is only 50% deductible. Yet other times, a business meal is totally nondeductible. It all boils down to a few factors: the meal’s purpose, who provides the meal, and who benefits from the meal. Legislation Brings New Rules To boost business spending at restaurants following the pandemic, Congress added a provision to the Consolidated Appropriations Act (CAA) passed in December 2020 that makes the cost of business-related meals served in a restaurant 100% deductible—but only for 2021 and 2022. Previously, deductions for business meals at restaurants were limited to 50%. While lawmakers may have temporarily increased the deduction for business-related meals, they made another change that eliminates your ability to write off most entertainment expenses—and that change is permanent. Starting in 2018, the Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses. Before the TCJA, you could deduct 50% of the cost of entertaining your clients, such as taking them to a ballgame or treating them to a round of golf. But after the TCJA, you can no longer deduct such expenses. Moreover, while you can deduct the cost of food and beverages consumed in conjunction with an entertainment event, the food and beverages must be purchased separately from the entertainment or stated separately on the bill in order to qualify for a deduction. Confused yet? We don’t blame you. For clarification on the finer details of these changes to the tax code, consult with us, your Family Business Lawyer™ or Certified Public Accountant (CPA). Meanwhile, here we will highlight a few of the most significant new rules for deducting meal and entertainment expenses for 2021 and beyond. Deducting Business Meals You are allowed to deduct the cost of business meals (food and beverages) as a business expense, and in most cases, the meal will be 50% deductible. The cost of the meal equates to the total cost of the food and beverages, including sales tax, tips, and delivery fees. To qualify for the deduction, you (the business owner) or an employee must be present during the meal, and the meal cannot be “lavish or extravagant.” The IRS does not define “lavish or extravagant;” instead, the agency states that the cost must be “reasonably based on the facts and circumstances.” The IRS also points out that meal expenses will not be disallowed simply because they exceed a certain price or because they take place at a fancy restaurant. However, as mentioned earlier, the CAA allows you to write off 100% of the cost of business-related meals provided by restaurants and bars from January 1, 2021, through December 31, 2022. This temporary 100% deduction applies to facilities that provide sit-down dining or take-out. The following are a few examples of situations where you would be able to claim the 50% deduction (or 100% for 2021 and 2022 if the meal is provided by a restaurant) for business meals:
Dinner with a client where work is discussed
Employee meals while traveling for business
Drinks, snacks, and other food items supplied for the office
Catered food for a board meeting
Meals you purchase while traveling for business
Food provided for employees who are working late
Eating lunch out with a few employees
Fully Deductible Meals
In certain circumstances, some meal expenses are fully (100%) deductible. Examples of fully deductible meal expenses include the following:
A holiday party for the entire company
A community event where you provide free food to the general public
A fundraising event where the proceeds go to a charitable organization
Food provided as part of employee’s taxable compensation (must be included on W-2)
A dinner out where at least half of all your employees are present
Meal Expenses You Cannot Deduct
Basically, most business-related meals you can think of are either 50% or 100% deductible, but there are some exceptions. For example, if you take a client out to dinner and invite your spouse and kids to come with you, neither your spouse nor your kids' meal expenses can be deducted. The clients’ spouse’s meal expense would not be deductible, either.
The same restriction would apply for meal expenses incurred by spouses, dependents, or other individuals who accompany you on business trips. The only instance where you could deduct such expenses would be if the spouse, dependent, or other person worked for your company.
Deducting Business Entertainment
As mentioned earlier, following the implementation of the TCJA in 2018, you can no longer deduct most entertainment expenses. Enterta