Written by: Anca Stradley, CPA, Dembo Jones
Deducting 50% of the ordinary and necessary expenses incurred for meals and entertainment in the pursuit of the taxpayer’s trade or business has been standard practice for many years. However, the last few years’ changes to the deductibility rules have made the treatment of these expenses pretty confusing, with some expenses being 100% deductible, others 50% deductible, while others 100% non-deductible.
What type of expenses are 100% non-deductible?
As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), no entertainment expense (any activity generally considered to constitute entertainment, amusement, or recreation) paid or incurred after December 31, 2017, is deductible.
What type of expenses are tax deductible?
As long as certain requirements are met, taxpayers are still permitted a 50% or 100% deduction for business meals (see below for changes under the Consolidated Appropriations Act for food and beverages purchased from a restaurant).
In order to be deductible for tax purposes, meals have to be “ordinary and necessary” business expenses, meaning they were incurred principally for business reasons and the expenses bore a reasonably close relationship to the conduct of the ongoing trade or business of the taxpayer.
However, “ordinary and necessary” food and beverage expenses may, in certain circumstances, be treated as entertainment expenses and subject to the disallowance rules if they are provided during or at an entertainment activity. In order to avoid the entertainment expense classification, food and beverages should be purchased or billed separately from the entertainment.
Food and beverage expenses remain deductible if:
- the expense is an ordinary and necessary business expense and incurred in carrying on the taxpayer’s trade or business,
- the expense is not lavish or extravagant under the circumstances,
- the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages,
- the food or beverages are provided to the taxpayer or a business associate, and
- the cost of the food or beverages are purchased separately or are stated separately from the cost of the entertainment and the amount charged for food or beverages reflects the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment, or approximates the reasonable value of those items.
There are some exceptions from the entertainment disallowance rules and the entertainment costs that meet these exceptions are usually deductible either at 50% or 100%. Some of these exceptions include food or beverages for the benefit of employees; entertainment costs that are directly related to business meetings of employees, stockholders, agents or directors; recreational activities for employees and a few others.
What type of expenses are 100% deductible in 2021 and 2022 only?
Per the Consolidated Appropriations Act signed into law on December 27, 2020, food and beverages paid or incurred after December 31, 2020, and before January 1, 2023, are 100% deductible if purchased from a restaurant. This temporary 100% deduction was designed to help restaurants, many of which have been hit hard by the COVID-19 pandemic.
A “restaurant” is defined 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’ premises. A restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption, including a grocery store, specialty food store, beer/wine/liquor store, drug store, convenience store, newsstand, or a vending machine or kiosk. The 50% limitation continues to apply to food or beverage expenses acquired from other types of businesses.
An employer may not treat as a restaurant:
- Any eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income
- Any employer-operated eating facility treated as a de minimis fringe benefit under IRS rules, even if that eating facility is operated by a third party
Also, the meal portion of a per diem rate or allowance is treated as attributable to food or beverages provided by a restaurant and receives a temporary 100% deduction if the expenses are paid or incurred after December 31, 2020, and before January 1, 2023 (Notice 2021-63).
Here are some examples of meals and entertainment expenses and their treatment for tax purposes:
|Type of Expense||Tax Deduction|
|Entertaining clients (concert tickets, golf games, etc.)||0% deductible|
|Business meals (that aren’t lavish) with clients, where work is discussed||50% deductible (100% deductible for 2021 or 2022, if purchased from a restaurant)|
|Employee meals while traveling||50% deductible (100% deductible for 2021 or 2022, if purchased from a restaurant)|
|Office snacks and meals||50% deductible (100% deductible for 2021 or 2022, if purchased from a restaurant)|
|Dinner provided for employees working late||50% deductible (100% deductible for 2021 or 2022, if purchased from a restaurant)|
|Meals and entertainment made available to the general public||100% deductible|
|Company-wide holiday party||100% deductible|
|Meals & entertainment (included in compensation)||100% deductible|
For accounting purposes, it is always a good idea to have a separate account for entertainment expenses. Also, travel expenses should be completely separate from entertainment, and there should be separate categories for expenses for holiday parties, team building events, etc. The more detail the better.
The tax and accounting teams at Dembo Jones can help you set up the internal systems to accurately capture these expenses, and are available to explain the nuances of these deductions. Give us a call.