Posted by Abundant Wealth Planning LLC

New Rules for Deducting Meal & Entertainment Expenses

New Rules for Deducting Meal & Entertainment Expenses

Inviting clients to dinner or a sporting event can be a great way to get to know your business partners and help you develop a closer relationship. Additionally, work-related meals and entertainment can be legitimate business expenses (with a few exceptions) that you can deduct from your business income tax.

That being said, the rules for deducting meal and entertainment expenses from taxes have changed a lot in recent years. And these changes have made it very confusing to understand exactly what you can (and cannot) undo on your tax return.

For example, in some circumstances, a corporate table has a 100% deductible, while in others, the same table only has a 50% deductible. However, other times, a business lunch is not deductible. It all comes down to a few factors: the purpose of the food, who provides it, and who benefits from it.


The legislation brings new rules.

To increase business spending at restaurants after the pandemic, Congress added a provision to the Consolidated Allocation Act (CAA) passed in December 2020, which makes the cost of corporate meals served in a restaurant 100% deductible, but only for 2021 and 2022. Previously, deductions for business meals in restaurants were limited to 50%.

While lawmakers could have temporarily increased the deduction for work-related meals, they have made another change that removes their ability to write off most entertainment expenses, and that change is permanent. Since 2018, the Tax Cut and Jobs Act (TCJA) has permanently removed deductions for most business-related entertainment expenses.

Before the Tax Cuts and Jobs Acts, you could deduct 50% of the cost of entertaining customers, such as taking them to a game of ball or golf, but after the TCJA, you can no longer deduct these expenses. Additionally, while it is possible to deduct the cost of food and beverages consumed at an entertainment event, to qualify for a deduction, food and beverages must be purchased separately from the entertainment or listed separately in your account.

Are you still confused? We don't blame you. Please consult a Certified Accountant (CPA) for clarification on these tax code changes. In the meantime, here we'll highlight some of the most important new rules for deducting food and entertainment expenses for 2021 and beyond.


Deducting business meals

You can subtract the cost of business meals (food and beverages) as a business expense, and in most cases, the meal will have a 50% deduction. The cost of the meal is equal to the total cost of food and drink, VAT, tip, and transport included.

To be eligible for the deduction, you (the business owner) or an employee must be present at the table, and the table cannot be "fancy or extravagant." The IRS does not define "luxury or extravagance"; instead, the agency argues that the cost must be "reasonably based on the circumstance and facts." The IRS also notes that food expenses will not be reimbursed simply because they exceed a certain price or are made in a luxury restaurant.

However, as mentioned above, the CAA allows you to pay 100% of the cost of business meals offered by restaurants and bars from January 1, 2021, to December 31, 2022. This temporary 100% deduction applies to units offering a seat - Check out or pick-up tables.

Here are some instances of situations where a 50% deduction (or 100% for 2021 and 2022 if a restaurant provides the food) may be claimed for business lunches:

  • Catering service for a board meeting

  • Dinner with a client to discuss work.

  • Drinks, snacks, and other food are provided at the office.

  • Food provided to employees who work late

  • Lunch with a few employees

  • Meals for employees on business trips

  • Meals purchased during a business trip


Fully deductible meals

In certain circumstances, certain meal expenses are deductible (100%). The following are examples of fully deductible meal expenses:

  • A community event where you offer free food to the general public.

  • A company-wide Christmas party

  • A dinner attended by at least half of all employees

  • A fundraising event in which the proceeds go to charity

  • Food provided as part of the employee's taxable remuneration (must be included on Form W-2)


Meal expenses that you cannot deduct

Most work-related meals you can imagine are 50% or 100% deductible, but few exceptions are. For example, if you invite a customer over for dinner and invite your spouse and children to join you, your spouse's or children's meal expenses cannot be deducted. Meal expenses for the client's spouse would also not be deductible.

The same restriction applies to food expenses incurred by spouses, dependents, or other persons accompanying you on a business trip. The only time you could deduct these expenses would be if you were a spouse, dependent, or someone else who worked for your business.


Deducting Business Entertainment

As mentioned above, after the establishment of the TCJA in 2018, it is no longer possible to deduct most entertainment costs. According to Uncle Sam, Entertainment is defined as "any activity generally considered to offer entertainment, recreation, or amusement" for IRS purposes.

This means you can no longer recoup the expenses of taking customers to a basketball, football, or other sporting events, hiring employees for a fishing trip, or music on Broadway. Or take a potential salesperson to a show in Las Vegas. It is also not possible to deduct the rental costs of an "entertainment facility," which includes a yacht, swimming pool, bowling alley, limousine, airplane, hotel suite, or villa in a resort.

The same restriction applies to the deduction of membership and club dues, such as a country club or golf course dues; these expenses cannot be deducted from taxes.

As mentioned earlier, although it is no longer possible to deduct most entertainment expenses, it is still possible to deduct the cost of food and beverages consumed at an entertainment event, such as hot dogs and beers and purchased during a baseball game. However, in order to qualify for the deduction, one of the following conditions must be met: 

  • Drinks and food must be purchased separately from the entertainment, 

  • The cost of food and drink must be shown separately on the invoice or receipt.

In view of this requirement, you should always insist on receiving itemized receipts whenever you visit a commercial entertainment venue.


Entertainment deductions are still available.

Despite these new restrictions, there are still entertainment expenses that you can fully deduct from taxes. According to Uncle Sam, you can deduct 100% of the cost of the following entertainment business expenses:

  • Entertainment expenses are declared in the tax return as taxable remuneration for employees.

  • Entertainment expenses for employee social or recreational activities, such as company parties or picnics.

  • Entertainment for your customers: For example, if you run a nightclub and organize a rock concert, these expenses are not subject to non-deduction rules.

  • Expenses related to attending conventions or business meetings of certain exempt bodies, such as professional leagues, chambers of commerce, or professional associations.


Keep track of your expenses.

The key to getting the most out of deductions for business expenses, such as meals and entertainment, is meticulously controlling expenses. The best way to go about it is to implement strong business systems.

You should also be aware of the latest changes in federal and state laws governing business expenses and other tax matters, and we can help you with that.


FOR MORE INFORMATION ON HOW ABUNDANT WEALTH PLANNING, LLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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