The federal income tax treatment of business-related meal and entertainment expenses has been a moving target. If you’re confused about what rules currently apply, I don’t blame you. This column aims to eliminate confusion. That’s an optimistic goal, but here goes.
A 2020 COVID-19 relief bill made taxpayer-friendly changes
A taxpayer-friendly change in the CAA — the COVID-19 relief bill that became law late last year — allows you to write off 100% of the cost of business-related food and beverages provided by restaurants in 2021 and 2022. The “provided by” language apparently means the temporary 100% deduction rule applies equally to sit-down meals and take out. Before this change, deductions for business meals at restaurants were limited to only 50% of cost.
However, there are some unanswered questions: Do bars that serve food count as restaurants? Presumably they do. What about airport lounges? What about food trucks? Nobody knows. We await IRS guidance.
What the earlier Tax Cuts and Job Act (TCJA) said
For 2018 and beyond, 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 most business entertainment. But after the TCJA change, you can no longer deduct any part of the cost of taking clients out for a round of golf, to the ballgame, or for a ride on the Ferris wheel. Rats.
What IRS regulations say
For too long, it was unclear what the impact of the TCJA’S general disallowance of write-offs for entertainment expenses would be on the deductibility of business-related meals. In 2020, the IRS finally issued eagerly-awaited regulations. They were written before the CAA change that now allows 100% deductions for business-related restaurant meals in 2021-2022. So, the regulations will need to be updated. Until then, they still provide the useful guidance summarized in the rest of this column.
What’s considered a food and beverage cost
Food and beverages mean all food and beverage items, regardless of whether they are characterized as meals, snacks, or whatever. In turn, food and beverage costs mean the full cost of such items — including any sales tax, delivery fees, and tips.
Why you should insist on detailed receipts from entertainment venues
For purposes of the general disallowance of deductions for entertainment expenses, the term entertainment does not include food and beverages unless: (1) the food and beverages are provided in conjunction with an entertainment activity (for example, hotdogs and beers at a basketball game) and (2) the food and beverages costs are not separately stated.
So, to be deductible, food and beverages consumed in conjunction with an entertainment activity 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. Fair enough. Insist on detailed receipts from entertainment venues.
Exceptions to the rules about business meals
According to the IRS regulations, you can still generally deduct 50% of the cost of business-related meals, as was the case before the TCJA. As stated earlier, however, you can deduct 100% of the cost of business meals provided by restaurants in 2021-2022.
All that said, no deduction is allowed for business meals unless:
- The expense is not lavish or extravagant under the circumstances (nobody knows what that means), and
- The taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverages, and
- The food and beverages are provided to the taxpayer or a business associate.
Business associate means a person with whom you reasonably expect to deal with in the conduct of your business — such as an established or prospective customer, client, supplier, employee, agent, partner, or professional adviser.
Key point: The regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself (say because you get stuck somewhere working late at night). You can deduct 100% of the cost if the business-related meal is provided to you by a restaurant in 2021-2022.
When you can deduct your spouse’s meals
Under the IRS regulations, the general rule is that 50% of the cost of meals (food and beverages) while traveling on business can still be deducted, as was the case before the TCJA. Or 100% for restaurant-provided meals in 2021-2022. The longstanding rules for substantiating meal expenses still apply. Keep receipts.
The regulations also reiterate the longstanding rule that no deductions are allowed for meal expenses incurred for spouses, dependents, or other individuals who accompany the taxpayer on business travel (or accompany an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual.
For example, meal expenses for your spouse are deductible if he or she works in your unincorporated business and accompanies you on a business trip for legitimate business reasons. The temporary 100% deduction allowance applies to legitimate business-travel-related meals provided to your spouse by restaurants in 2021-2022.
Some little-known deductions are still available
Before the TCJA, the following favorable tax-law exceptions allowed 100% deductibility for eligible meal and entertainment expenses.
A little-known fact is that these exceptions are still available in the tax world that we currently live in. These long-standing but not necessarily well-known exceptions predate the CAA’s temporary 100% deductibility allowance for business-related meals provided by restaurants in 2021-2022.
- Your business can deduct 100% of meal and entertainment expenses that are reported as taxable compensation to recipient employees. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
- Your business can deduct 100% of food, beverage, and entertainment expenses incurred for recreational, social, or similar activities that are incurred primarily for the benefit of employees other than certain highly compensated employees (for example, food and beverages and entertainment at company picnics or company holiday parties that can be attended by all). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
- Your business can deduct 100% of the cost of food, beverages, and entertainment that is made available to the general public (for example, free snacks at a car dealership or free food and music provided at a promotional event open to the public). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
- Your business can deduct 100% of the cost of food, beverages, and entertainment sold to customers for full value, including the cost of related facilities. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses. The regulations also confirm that a restaurant or catering business can still deduct 100% of the cost of food and beverage items that are purchased in connection with preparing and providing meals to paying customers and that are consumed at the worksite by employees who work in the restaurant or catering business.
- Your business can deduct 100% of the cost of meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, when a potential customer wins a dinner cruise for 10 valued at $750 at a sales presentation and is issued a Form 1099). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
The bottom line
There you have it: several ways your business can deduct 100% of meal costs and even 100% of eligible entertainment expenses. Party on.