An important deduction to consider during tax preparation is business meals. In an effort to help restaurants, many of which have struggled during the COVID-19 pandemic, the Consolidated Appropriations Act (CAA) of 2021 includes a temporary change that increases the deduction of business meals. Any food or beverages provided by a restaurant is now 100 percent deductible (up from 50 percent) if paid or incurred after December 31, 2020, and before January 1, 2023.
The Definition of “Restaurant” Explained
The term restaurant is defined 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’ premises.”
A restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or vending machine or kiosk (IRS Notice 2021-25). The 50 percent limitation would continue to apply to the amount of the allowable deduction acquired from such a business.
In addition, an employer may not treat the following as a restaurant, if:
- Any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income.
- Any employer-operated eating facility treated as a de minimis fringe, even if such eating facility is operated by a third party under contract with the employer (IRS Notice 2021-25).
Taxpayers may continue to deduct either 50 percent (and for 2021 and 2022, 100 percent if purchased from restaurant) of their food and beverage expenses associated with operating their trade or business, including meals consumed by employees on work travel.
Entertainment is Still Nondeductible
There is no change to deductions allowed for entertainment purposes. Businesses are not able to submit deductions for entertainment, amusement or recreation, or other social purposes, such as country clubs, golf and athletic clubs.
The term entertainment does not include food or beverages if the food or beverages are purchased separately from the entertainment or the cost of the food or beverages is stated separately from the cost of the entertainment on one or more invoices. If the food or beverages is not purchased separately, then the entire amount is a nondeductible entertainment expenditure.
While the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deduction for entertainment expenses, it did not amend the provisions relating to the deductibility of business meals.
Designating Food and Beverage Expenses
Food and beverage can be deducted if it meets the following requirements:
- The expense in not lavish or extravagant under the circumstances.
- The taxpayer (or an employee of the taxpayer) is present at the furnishing of the food or beverages.
- The food and beverages are provided to a taxpayer or a “business contact,” defined as a current or potential business customer, client, consultant or similar business contact.
As a reminder, it’s important to keep thorough records of food and beverage expenses, such as:
- Amount of the expense
- Date of the expense
- Location of the expense
- Business purpose of the meal; and
- Identification of who was present at the meal
Of course, most of this information can be found on the receipt.
Please contact your business partners at Walz Group to discuss these deduction guidelines.