You Can Deduct 100% of Some Business Meals in 2021 and 2022
Fortune magazine reports that more than 110,000 eating and drinking establishments closed in 2020. The pandemic was a financial tsunami that wiped out many local restaurants in business districts. The trouble was doubly hard for lunch spots in commercial areas. Due to social distancing and fewer folks coming into the office, many restaurants in business areas lost customers.
Late last year, under the Consolidated Appropriations Act (CAA), Congress offered a temporary lifeline for struggling restaurants. The CAA allows taxpayers to deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022.
Meal Deduction Cuts Under TCJA Delayed
Before 2017, if you took a client or prospective client to lunch, you could only deduct 50% of the meal from your taxes. The Tax Cuts and Jobs Act (TCJA) had permanently eliminated deductions for business meals after 2017.
With the restaurant industry facing such financial headwinds, Congress decided to offer a lifeline with the CAA.
Business Meals Eligible for the 100% Deduction
The IRS clarified allowable deductions under the CAA last quarter. To qualify for the full 100% meal deduction, you must purchase a meal for immediate consumption. This deduction applies to meals at eating establishments, which prepare and sell food or beverages to retail customers for immediate consumption on or off-premise. So, you can use this deduction for on-site dining and takeout.
Furthermore, the rule allows taxpayers to deduct the cost of food or beverages. The term “cost” includes related delivery fees, tips, and sales tax.
You cannot deduct meals you purchase from a business that sells primarily pre-packaged foods or beverages not requiring immediate consumption (such as a grocery store).
Businesses also cannot deduct meals provided by an eating facility on-site at the business. So, there’s no free lunch from the company cafeteria. Furthermore, the rule excludes meals from any employer-operate eating facility where the employer treats the meals as a fringe benefit.
If You Take Them Out to the Ballgame, Roasted Peanuts Count
If you take the client out to the ballgame, you can deduct the roasted peanuts but not the tickets to the game.
While the IRS still needs to clarify this part of the regulation, we think you can use prior rules for entertainment and food deductions as a guide. Previously, the IRS said in order to deduct the cost of food and beverages during an entertainment event, the taxpayer must:
- Purchase the food and beverages separately from the entertainment, or
- Provide evidence on a bill, invoice, or receipt of the cost of the venue’s typical selling price for the items (as if the taxpayer purchased the food and beverages separately from the entertainment.)
If taxpayers cannot separate the cost of the food and beverages from the entertainment charge, they cannot deduct any of the transactions.
Other Exceptions to the Rule
Also, under the final rules, the taxpayer can deduct business-related food or beverage only if:
- The expense is NOT extravagant
- The taxpayer or an employee of the taxpayer is present when the guest consumes the food or beverage
- The taxpayer or a business associate* also receives the food and beverage.
*In this case, the IRS defines a business associate as a person the taxpayer could reasonably expect to engage within his or her business, such as a customer, client, supplier, employee, agent partner, or professional advisor.
The regulations also restate the long-standing rules related to not permitting deductions of meals consumed by spouses, dependents, or others accompanying the taxpayer on a business trip. This rule would not apply if the person accompanying the taxpayer also worked for the business.
So enjoy those business meals, and help your local restaurant.
If you have any questions about the deductibility of business meals, please contact us.