In 2021, the Consolidated Appropriations Act (CAA), made major changes to the tax regulation surrounding business meals. Namely, in most situations, businesses can temporarily deduct 100% of the expenses related to business meals in 2021 and 2022. The act aims to help a struggling restaurant industry recover from pandemic restrictions while simultaneously fostering business growth. However, as with all IRS regulations, certain conditions must be met.
What the New 2021 Tax Law States about Business Meal Deductions
The CAA allows businesses to write off 100% of the cost of business-related meals and beverages “provided by restaurants” from January 1, 2021, to December 31, 2022. Before the CAA, you could only deduct 50% of the costs for business meals in most situations. However, the tax code has changed several times in the last five years, which has created some confusion surrounding how much and in what circumstances taxpayers could deduct business meals.
How the Tax Cuts and Job Act Changed Business Meal Deductibility
In 2018, the Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business-related entertainment expenses. Before this law, business could deduct 50% of expenses associated with entertaining clients, like a round of golf or tickets to a sporting event. The biggest confusion: business meals were often included as part of the definition of business entertainment.
At the time the TCJA was passed in 2017, it was unclear whether business meals where business associates were being entertained were considered entertainment or considered business meals. I.E. We knew that you could deduct 50% of your employee’s per diem while travelling, but whether you could deduct a lunch with a prospective customer. Clarification from the IRS in 2020 established that meals with business associates like prospects and clients could still be deducted at 50%.
Entertainment and meals can still often overlap, however, which makes distinguishing between the two and obtaining itemized receipts and invoices necessary. For example, if your business hosted a client appreciation event, the cost of the venue would not be deductible, but the catering and bartending bill would be 50% deductible (provided you only invited business associates and not their spouses).
What is Considered a Business Meal?
Business meals must be conducted with a business associate in a restaurant to be eligible for the 100% deduction, but even such a simple statement can get a bit tricky when the terms aren’t clearly defined. Luckily, we do have clear definitions for ‘business meals’ and ‘business associates’ from the IRS.
Business Meals: the cost of meals for a sole proprietor or business associate that are ordinary and necessary expenses paid or incurred in carrying on a trade or business.
Examples: Meals during business travel, client meetings over coffee, snacks provided at the business
Business Associate: a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s trade or business
Examples: prospects, clients, lawyers, suppliers, partners, employees, etc.
You don’t necessarily have to sit down for a meal for the food and beverages to be 100% deductible. Take-away, to-go, and delivery are all included in the new CAA rules. You don’t have to eat a full meal either. Cocktails, appetizers, snacks—any food or beverage provided by a restaurant can be 100% deductible when consumed with a business associate. That 100% also includes the extra fees and expenses related to the food and beverage like delivery fees, tips, and even sales tax.
What Is Not Included in the New Business Meal Deductions
While it might seem pedantic, the term ‘restaurant’ is where we get a little hung up on the new CAA business meal deductions. The IRS defines a ‘restaurant’ as: a business that prepares and sells food or beverages to retail customers for immediate consumption. This definition still leaves room to interpretation in context when trying to establish whether, for example, a catered meal is deductible.
Notice 2021-25 from the IRS does clarify that a ‘restaurant’ does not include businesses that primarily sell pre-packaged items such as grocery stores, vending machines, liquor stores and kiosks. The notice also clarifies that any employer-operated or on-premises eating facility does not qualify for the 100% deduction.
Grey areas might include catered meals or meals at food trucks, airport lounges, social clubs or a sports stadium. The latter two examples, which in many instances can fall under the entertainment umbrella, make them particularly difficult to parse. To be 50% deductible under the TCJA, food and beverages consumed in conjunction with an entertainment activity must be purchased separately with an itemized receipt that reflects this fact.
So, if your round of golf comes with a complementary cocktail, that drink is entirely non-deductible. Currently, under the CAA, it’s unclear whether an itemized receipt for a drink at a country club after a round of golf with a client would be 50% or 100% deductible.
What Was Never Included in Meal Deductions
There have always been exceptions to what the IRS allows businesses to deduct as ‘business meals.’ It stipulates that business meals cannot be deducted unless:
- The taxpayer or business associate directly received the food and beverages
- The taxpayer or an employee is present when the food or beverage is received
- The expense is not lavish or extravagant under the circumstances
So, if you buy a round of drinks for a nearby table during a business dinner, that’s not deductible. If you choose to bring your spouse along on a business trip, their meals are not tax deductible. While the last stipulation is up to a lot of interpretation, let’s just assume that if your prospective client has comparable assets and income to your current clients and you buy the prospect Dom Perignon and the clients Budweiser, the difference is not tax deductible.
What Has Been 100% Tax Deductible Through the CAA and TCJA
A few notable exceptions to the TCJA allowed you to deduct 100% of your business entertainment and meal expenses, even before the CAA. These exceptions still hold under the CAA, and include:
- Meals and entertainment reported as taxable compensation to employees
- Meals and entertainment reported as taxable income on a 1099
- Food, beverage or entertainment expenses incurred for activities that primarily benefit non-highly compensated employees such as holiday parties or employee picnics
- The cost of food, beverages and entertainment made available to the general public such as free food and drinks at promotional events
- Any food and beverages sold to customers at full value
Take Advantage of These Benefits by Hiring an Experienced CPA Firm
An experienced CPA firm like RiverRidge CPAs can help you navigate the changing world of business meal and entertainment tax deductions, and keep you updated to the latest changes in IRS regulations. Our team of accountants are committed to providing you with the best tax and accounting services, so you can focus on strengthening and growing your business. We help clients find the best solutions to fit their specific business needs.
If you are ready to get an experienced accountant’s help with tax preparation, bookkeeping, compliance and assurance reach out to RiverRidge CPAs today. Give us a call at our Nashville office at 615-549-6536 or our Knoxville office at 865-660-6202, or you can reach out to us online.