Meals and Entertainment Deductions Update

Following the federal income tax treatment of business-related meal and entertainment expenses has been a rollercoaster ride in recent years. Here we will get you up to speed on the current deductions (or lack thereof) available for your business.

100% deduction: Business-related food and beverages provided by restaurants in 2021-2022
The CAA, the 2020 COVID-19 relief bill, included this temporary change. The “provided by” language means both sit-down meals and take-out. This does leave some unanswered questions, such as whether this includes airport lounges or bars that serve food. The IRS has not provided clarification.

50% deduction: Business-related food and beverages not provided by restaurants
The regulations are clear that you can deduct 50% of the cost of a business-related meal for yourself (for example, if you’re working late and get yourself food). As mentioned above, you can deduct 100% of this cost in 2021-2022 if this meal is provided to you by a restaurant.

No deduction: Business-related entertainment expenses
For example, there is no deduction for any part of the cost of taking clients out for a round of golf or to the ballgame. This deduction was permanently eliminated for 2018 and beyond with the Tax Cuts and Jobs Act. Prior to the TCJA, you could deduct 50% of the cost of most business entertainment.

“Food and beverage” costs: means all food and beverage items (meals, snacks, whatever you call them)
This also means the full cost of such items – including any sales tax, delivery fees, and tips.

You need detailed receipts!
Be sure to insist on detailed receipts from entertainment venues. To be deductible, food and beverages consumed in conjunction with an entertainment activity (for example, nachos and beers at a baseball game with a client) must:

1. Be purchased separately from the entertainment, or
2. Be separately stated on a bill, invoice, or receipt that reflects the usual selling price for the food and beverages if they were purchased separately from the entertainment, or the approximate reasonable value of the food and beverages if they were not purchased separately.

You do not want to inflate the amount charged for food and drinks to get around the restriction on entertainment. In other words, don’t reallocate expenses so that the baseball game with clients costs $20 and the lunch after costs $300.

But speaking of receipts…
No matter the deduction or reason for it, the longstanding rule for substantiating any meal or beverage expense (or any business expense in general!) still applies — i.e., get and keep all of your receipts.

Exceptions to the rules about business meals
Your meals deduction is only allowed if:

• The expense is not lavish or extravagant (this is as gray as it sounds),
• The taxpayer (the business owner) or an employee of the taxpayer is present when the food and beverages are furnished, and/or
• The food and beverages are provided to the taxpayer or business associate*.
  *A business associate is a person with whom you reasonably expect to deal with in the conduct of your business — such as an established or prospective customer, client, employee, supplier, partner, or professional adviser.

Deducting your spouse’s meals
If your spouse is a bona-fide employee of the business, you can take them to lunch or dinner for a discussion that needs to be done outside of the office (for example, to discuss confidential matters like pay increases or terminations). In 2021-2022, these meals provided by restaurants is 100% deductible.

If your spouse has no relation to your business, there is no deduction for these meals.

As far as travel goes, the general IRS rule is that 50% of the cost of food and beverages while traveling on business can be deducted (or 100% of meals provided by restaurants in 2021-2022). But no deduction is allowed for meal expenses for spouses, dependents, or others who accompany the taxpayer on business travel unless the expenses would otherwise be deductible. For example, if your spouse works for your business and accompanies you on a business trip for legitimate business reasons.

Other little-known deductions that are available to your business
These deductions were available even before the TCJA’s permanent change and the CAA’s temporary change, but are often forgotten.

• 100% deduction: meal and entertainment expenses that are reported as taxable compensation to recipient employees.
• 100% deduction: food, beverage, and entertainment expenses for recreational, social, or similar activities that are incurred for the benefit of employees other than only highly compensated employees (for example, food, beverages, and entertainment provided at company picnics or holiday parties that can be attended by all staff).
• 100% deduction: food, beverage, and entertainment (including the cost of related facilities) sold to customers for full value.
• 100% deduction: meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, when a customer at a sales presentation wins a dinner cruise valued at $650 and is then issued a Form 1099).