Understanding Business Meal & Entertainment Deduction Rules From the IRS

The last few years have seen the IRS highlight quite a few changes in how the tax agency allows businesses to handle meal and entertainment costs in relation to their taxes. 

The 2018 Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business-related entertainment expenses. 

Then the pandemic hit. The IRS has temporarily changed the tax-deductible amount allowed for some business meals. The overall goal is to encourage increased sales at restaurants as a kind-of stimulus. 

With the easing of restrictions, businesses may be considering company picnics for employee appreciation or starting up business lunches with clients again. 

The trusted business advisors of LongSchaefer are here to help you understand the business meal and entertainment deduction rules from the IRS in today’s blog.

Tracking Your Business Meal & Entertainment Expenses

With all of these changes, you must put a system in place to accurately track business food and entertainment expenses. Best practices are what they always were before the changes, but you should be aware of them in case you decide to take advantage of this new move by the IRS. 

Request detailed receipts from your restaurant, caterer, or entertainment provider. Track which costs fall under the 50 percent deduction, 100 percent deduction, or not deductible categories separately.

In addition to keeping excellent records, keep some additional things in mind about the business meal and entertainment deduction rules. Our handy chart highlights each deduction category particular meal and entertainment expenses fall under.

Meal and Entertainment Expense Changes

Under the TCJA, the IRS no longer allows businesses to deduct most entertainment expenses. This is true even if your expenses were a cost of doing business. Deductions for food and beverage-related to entertainment venues are only covered when you have detailed receipts separately stating the cost of the meal.

Another change from the TCJA is that spouse or guest meals are not covered during travel unless your business employs that person. So, if your spouse accompanies you on a work trip, meals are not deductible for the business.

Increased Deductions for Restaurants Unil 2022

The Consolidated Appropriations Act of 2021 (CAA) temporarily increased the deduction for business meals from restaurants to 100 percent for tax years 2021 and 2022. 

Not all meals are created equal, however. 

The 100 percent deduction is only available for meals provided by restaurants, which the IRS defines 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’s premises.” Prepackaged food from a grocery, specialty, or convenience store is not eligible for the 100% deduction and would be limited to a 50% deduction. However, you could get catered food for your business to consume at a venue that’s not the restaurant to qualify for the 100% deduction.

Also note that the expenses must be considered ordinary (common and accepted for your business) or necessary (helpful and appropriate) rather than lavish or extravagant. An employee of the business or the taxpayer must be present during the meal, as well. 

Business lunches, holiday parties, birthday recognition, or promotion celebrations are all ordinary. But taking the entire company out to a five-star restaurant once a day might be considered lavish or extravagant. 

Quick Guide to Business Meal Deductions

 

Expense CategoryDeductible AmountTax Code Reference
Company social events and facilities for employees (e.g., holiday parties, team-building events)100%IRC Secs. 274(e)(4) and 274(n)(2)(A)
Meals and entertainment included in employee or non-employee compensation100%IRC Secs. 274(e)(2) and (9)
Reimbursed expenses under an accountable plan100%IRC Sec. 274(e)(3)
Meals and entertainment made available to the public100%IRC Sec. 274(e)(7)
Meals and entertainment sold to customers100%IRC Sec. 274(e)(8) 
Business travel meals50%

100% (1/1/2021 to 12/31/2022)*

IRC Secs. 274(e)(3) and 274(e)(9)
Client/customer business meals50%

100% (1/1/2021 to 12/31/2022)*

Notice 2018-76
Business meeting meals50%

100% (1/1/2021 to 12/31/2022)*

IRC Secs 274(e)(5), 274(k)(1), and 274(e)(6)
De minimis food and beverages provided in the workplace (e.g., bottled water, coffee, snacks)50%IRC Sec 274(e)(1)
Meals provided for the convenience of the employer 50% (through 12/31/2025)

0% (on or after 1/1/2026)

IRC Sec. 274(n) and 274(o)
Employer-operated eating facilities50% (through 12/31/2025)

0% (on or after 1/1/2026)

IRC Sec. 274(n) and 274(o)
Meals/beverages associated with entertainment activities when not separated stated on the receipt0%Notice 2018-76
Personal, lavish, or extravagant meals/beverages in relation to the activity0%IRC Secs. 274(k)(1) and 274(k)(2)
Entertainment without exception0%IRC Secs. 274(a)(1) and 274(e)

*Meals are only deductible in the 2021 and 2022 tax years if provided by a restaurant, as defined by the IRS in the above article. 

Talk to the Trusted Business Advisors of Long Schaefer

If you need help establishing a system to better track expenses or seek clarification on whether certain expenses are tax-deductible, give our team of Cincinnati CPAs and trusted business advisors a call today at 513-245-0300.

Tax Planning: What Are the Differences Between Tax Credits & Tax Deductions?

As you prepare to file your income tax return, you’ll probably run across the terms tax deduction and tax credit. Both individuals and businesses can take advantage of tax deductions and credits to lower their income tax and possibly increase their refund. In today’s blog from LongSchaefer, our tax planning experts take a look at the differences between tax credits and tax deductions. 

Related Post: How Filing Taxes Electronically Works

Reducing Income Versus Reducing Taxes You Pay

The major difference between a tax deduction and a tax credit is that deductions lower the income on which the government bases its tax calculations, while tax credits directly reduce the amount of tax you owe.

For example, you get to take a tax deduction of $18,650 because you’re the head of a household. If you made $50,000 in that year, the head of household deduction lowers the amount of your gross income to $31,350. Rather than pay 15% of your income at $50,000, you pay 15% of $31,350. You would pay $4,702.50 rather than $7,500 for taxes in this simplified example.

After you calculate how much money you owe in taxes, a tax credit can lower the amount of tax you pay (or even lead to a higher income tax return). For instance, your tax bill comes to $700. However, you qualify for two tax credits. One is refundable for $500, and one is non-refundable for $750. The $750 credit reduces the amount of tax you owe to $0, while the refundable tax credit means you receive $500 from the IRS.

Deferring income to retirement also has tax benefits for you before you retire. The IRS allows an annual $19,500 elective deferral to 401(k) plans. When you reach age 50, that maximum amount increases to $26,000. You don’t pay income taxes on that pre-tax deduction when you’re working because you’ll pay income taxes after you retire.

Tax planning services can point you to the right types of tax credits or tax deductions available to you.

Examples of Tax Credits

The most common tax credit for individuals is the Child Tax Credit from the Internal Revenue Service. In general, your child must be 16 years old or younger and meet certain qualifications. Each individual can earn up to $2,000 per qualifying child, and up to $1,400 of that is refundable, meaning you can get money back from the IRS. 

There’s also the Earned Income Tax Credit for working people with low to moderate incomes who have children. The EITC is in addition to the Child Tax Credit. 

Business owners can take advantage of tax credits, too. Small employers can take the General Business Credit for undertaking certain activities, such as investing in electric vehicles, increasing research activities, retaining employees, and having employer differential wage payments. Tax planning staff at LongSchaefer will show you what tax credits you may be eligible for.

A refundable credit means you could get that money back from the IRS. A non-refundable credit simply lowers the amount of taxes you may owe, all the way down to zero.

Examples of Tax Deductions

Tax deductions work differently for individuals and businesses. Individuals can take a  standard deduction based on your filing status (single, head of household, or married filing jointly). 

Individuals may choose to deduct certain health care expenses, interest paid on mortgages, and charitable donations. There is one caveat: You can itemize your deductions for federal income taxes, but they must be more than your standard deduction. 

You can deduct certain business expenses from your income to lower your income. Let’s say your business earned $200,000 in 2020. But you invested in new equipment that cost $25,000, advertising for $5,000, and computer software at $3,000. All of these items could lower your income to $167,000. At 25%, you would pay $41,750 in income taxes rather than $50,000 in this simplified example.

Related Post: Tax Credits You Didn’t Know About

Tax Planning From LongSchaefer

The tax planning pros at LongSchaefer can help you get the most out of your income taxes, whether you’re a business or an individual. Contact us online or call (513) 245-0300 for more information on how our firm can help.

May 2020 COVID-19 Update

In order to comply with the Ohio Health Department Order & CDC social distancing recommendations, our offices are closed until further notice. Rest assured that our established protocols and available technology will allow us to provide the same level of service and quality you expect from LongSchaefer during this time.

The SBA has announced details of how it’s helping small businesses through the Coronavirus outbreak. The IRS is sending payments to families affected by this crisis. 

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