With so many tax changes taking place over the last few years, it is hard to keep up with everything that is going on. However, this one is worth a reminder since it is only available (for now) during 2021 and 2022.
In the Consolidated Appropriations Act of 2021, business meal deductions were increased from 50% to 100% to encourage more people to eat out and help bring back the restaurant industry. Some of the details were a bit blurry, so on April 8, 2021 the IRS issued a notice that provided further guidance on what qualifies and what doesn’t.
Basically, the 100% deduction applies to food and beverage purchased for business purposes in a restaurant, assuming the expense is not overly “lavish or extravagant” and the owner of the company or an employee of the taxpayer taking the deduction is present at the meal. The “restaurant” can’t be a place that primarily sells pre-packaged food or beverages for takeout or later consumption, though food purchased at those establishments may qualify for the 50% deduction.
A few points of clarification:
- “Lavish & extravagant” aren’t clearly defined, so use your judgement. However, this is what the IRS says about it: “You can’t deduct expenses for meals that are lavish or extravagant. An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances. Meal expenses won’t be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts.”
- Client entertainment expenses are not deductible, but if you purchase a meal while entertaining, like at a football game, that meal can be deductible. You just need to be sure that you purchase it separately from the event ticket and have an itemized receipt for the meal.
- Meals purchased while traveling for business qualify for the 100% deduction, even if no client is present. However, if you are traveling for work and someone who is not employed by the company has a meal with you, only your portion is deductible.
Keep in mind that this is only valid for this and next year, at which time the deduction will return to 50% unless another rule change is made. As always, make sure you keep receipts and accurate records of all your business spending. Make notes on your receipts or in your files about who was at each meal, what was discussed and where it was located just in case you must answer questions about it in the future. Now go out and enjoy a meal with your favorite client!