Understanding Business Meal & Entertainment Deduction Rules From the IRS

Words Tax Deductions in wooden block letters on a notepad

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.

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest

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. 

Please click on our Coronavirus information pages for more information.