Business Deductions for Meals and Entertainment Receive Another Update by Kevin McNally, JD
Posted on January 07, 2021
The second round of COVID-19 stimulus signed into law on Dec. 27, 2020, temporarily lifts the 50 percent limitation on deductions for business meal expenses that was first introduced in 2017 by the Tax Cuts and Jobs Act (TCJA). Effective for tax years 2021 and 2022, businesses may fully write off 100 percent of the expenses they pay for food and beverage provided by restaurants.
Congress introduced this generous two-year, business meals and beverages deduction in an effort to boost consumer spending at the nation’s restaurants, which have been hit especially hard by the pandemic. According to the National Restaurant Association, more than 110,000 restaurants have gone out of business since March 2020, and 37 percent of restaurants surveyed think it is “unlikely” they will still be open through the first half of 2021. It remains to be seen how the IRS will ultimately interpret Congress’s intent and apply it to tax laws and whether the expanded deduction will actually help the restaurant industry.
For example, while the specific language contained in the Consolidation Appropriations Act of 2021 calls for a 100 percent business meals deduction for “food or beverages provided by a restaurant”, it does not specific that the deduction applies to both in-restaurant dining as well as carryout and delivery services (although that is assumed). Moreover, taxpayers will need to wait for IRS guidance to determine if the deduction will also apply to restaurant and/or third-party delivery fees and whether it may be claimed when meals are enjoyed at the private residences of the nation’s growing telework workforce.
The Tax Cuts and Jobs Act (TCJA) eliminated deductions for business expenses related to entertainment, recreation and amusement activities but retained a deduction for the costs of food and beverages when businesses meet certain conditions. In November 2020, three years after the enactment of original law, the IRS issued final guidance clarifying and, in some cases, relaxing the regulations.
Under the TCJA, businesses may deduct 50 percent of their costs (or 100 percent for tax years 2021 and 2022) for providing food and beverages during entertainment activities, including golf outings, fishing trips, concerts and sporting events, when they meet the following criteria:
- the food and beverage expenses are ordinary and necessary to the operation of the taxpayer’s business;
- the meal is neither lavish nor extravagant;
- the taxpayers or an employee is present when the food or beverages are served;
- the meal is served to current or potential customers, clients, consultants or similar business associate (including employees under the final regulations); and
- the food and beverage costs are separate from any nondeductible entertainment expenses incurred during or in connection with the meal.
Expanded Definition of Food and Beverage Expenses
Under the final TCJA regulations, expenses qualifying for the 50 percent business meal deduction would include the costs for food and beverages as well as sales tax, delivery fees and tips. Specifically excluded from the deduction are the costs of travel/transportation to a meal and the expenses a taxpayer incurs for the operation of an on-site dining facility, such as salaries for food preparers servers. It is not yet clear whether these additional costs will qualify for the temporary 100 percent business meals deduction for tax years 2021 through 2022.
Employees Included as Business Associates
The final regulations expand the availability of the 50 percent business meals deduction (or 100 percent for tax years 2021 through 2022) to taxpayers who provide food and beverages to persons with whom they “could reasonably expect to engage in the active conduct of its business,” including current and prospective employees, suppliers, agents, partners, professional adviser as well as established and prospective customers/clients. Because the final regulations include employees as a type of business associate, taxpayers may deduct meals provided to its employees and non-employee business associates at the same events. However, taxpayers must remember that while they may deduct expenses for meals provided to employees’ spouses and dependent attending a taxpayer’s business event, such as a family picnic, no deduction is allowed for expenses incurred by a spouse or dependent who accompanies an employee on business trips.
Separating Entertainment from F&B Expenses
Taxpayers must make every effort to clearly distinguish purchases of deductible food and beverage costs from nondeductible entertainment expenses, which include membership fees to clubs organized for business, pleasure, recreation or other social purposes.
If a venue or other service provider does not itemize these costs on separate bills, invoices or receipts, businesses should be careful to estimate an appropriate amount for that is neither “lavish nor extravagant” but does provide “reasonable value” compared to the entertainment costs. The difference between receiving a deduction or not depends largely on taxpayers to maintain meticulous documentation.
While the final regulations confirm nine exceptions to the entertainment-expense deduction that would otherwise be disallowed, they also include specific examples of how businesses may apply the new rules to their unique circumstances. These illustrations specifically address situations in which businesses have on-site employee cafeterias and those that involve arrangements with independent contractors and reimbursements for meals enjoyed while traveling for business purposes.
About the Author: Kevin McNally, JD, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with high-net-worth families, private equity firms and real estate development businesses on a broad range of tax matters, including complex deal structuring. He can be reached at the CPA firm’s Miami office at 305-379-7000 or at email@example.com.