In 2018, the Tax Cuts and Jobs Act (TCJA) reduced what you could deduct for meals expenses. For 2021, the Consolidated Appropriations Act has temporarily restored some of the deductions for meals expenses for the years of 2021 and 2022.
Previously, meals purchased from a restaurant which met the business deductions test under Code Section 274, were deductible at 50%. For 2021 and 2022, meals purchased from a restaurant are now deductible at 100%.
What taxpayers must understand is the definition of “restaurant.” A restaurant (Notice 2021-25) is defined as a business that prepares and sells food and beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premise. It does not include any business that primarily sells prepackaged foods or beverages not for immediate consumption, meaning grocery stores, specialty food stores, beer/wine/liquor stores, drug stores, convenience stores, newsstands, vending machines, or kiosks. Expenses incurred in these establishments are still subject to the 50% deduction.
Below are the new updates to the Expense Categories from our original article:
|Business travel meals from restaurants (2021 and 2022)||100%|
|Client/customer business meals from restaurants (2021 and 2022)||100%|
|Business meeting meals from restaurants (2021 and 2022)||100%|
|Meals provided for the convenience of the employer (before 2026) from restaurants (2021 and 2022)||100%|
Original Post: 11/25/2019 PLEASE NOTE UPDATES ABOVE FOR 2021 AND 2020 CHANGES
By now most business owners and their accounting staff know that the Tax Cuts and Jobs Act (TCJA) brought substantial changes to the way that meals and entertainment expenses are handled when it comes to tax deductions. Prior to the TCJA, qualified entertainment costs and most meals could be deducted at 50%, but this is no longer the case. With several exceptions, entertainment is no longer a deductible expense for business owners. In addition, several categories of meals which were deductible at 100% are now only a 50% deduction.
As the 2019 tax season approaches, it’s a good time to brush up on the changes and ensure that best practices for documenting the different levels of deductibility are deployed to save time and money at tax time.
OVERVIEW OF ENTERTAIMENT AND MEALS
By definition, entertainment expenses, even with a business purpose, fall into these categories and are not deductible, without an exception:
There are several changes to consider with meals, making it important to track and document all meal expenses. For dining with clients, employees and potential clients and discussing business, these expenses are still deductible at 50%. For meals on business when traveling outside of the normal commute, these expenses also remain deductible at 50%.
There are also changes under TCJA with food and beverage purchases for employees at the office. Once deductible at 100%, this expense is now deductible at 50%. But, food can be written off at 100% for a company party or social event, where more than half of the attendees are employees, not including owners or highly compensated employees. Food that is provided for free at a function for prospective customers, for the purpose of advertising or promoting goodwill, is also deductible at 100%.
When meals are associated with entertainment, record keeping becomes critical. All food expenses must be reflected as a separate line item to be deductible. If you take a client to a football game and purchase food, the game tickets cannot be deducted, but if the food is purchased separately, it can be deducted at 50%.
THE IMPORTANCE OF GOOD RECORD KEEPING
With so many expense categories and variances in meals and entertainment, keeping good records becomes very important and can help reduce tax preparation time and fees, lessen the potential for lost deductions and possibly soften a critical eye in the event of an IRS audit.
A best practice for accounting meals and entertainment is to create separate general ledger accounts to categorize each level of deductibility that you incur. These categories might include Meals – 100%; Meals – 50%; or Nondeductible meals and entertainment.
|Expense Category||Deductible Amount|
|Company social events for employees (holiday parties, company picnics, etc.)||100%|
|Meals and entertainment included in employee or nonemployee compensation||100%|
|Reimbursed expenses under an accountable plan||100%|
|Meals and entertainment made available to the public||100%|
|Meals and entertainment sold to customers||100%|
|Business travel meals||50%|
|Client/customer business meals||50%|
|Business meeting meals||50%|
|De minimis food and beverages provided in the workplace (e.g., bottled water, coffee, snacks)||50%|
|Meals provided for the convenience of the employer (before 2026)||50%|
|Employer-operated eating facilities (before 2026)||50%|
|Meals provided for the convenience of the employer (after 2025)||0%|
|Employer-operated eating facilities (after 2025)||0%|
|Nonseparately stated meals/beverages associated with entertainment activities||0%|
|Personal, lavish or extravagant meals/beverages in relation to the activity||0%|
|Entertainment without an exception||0%|
A summary of the various type of expenses and their percentage deductions are as follows:
Your business may have regular activities that could require additional categories to be created. It’s important to work with your accounting team to look at your existing expense categories and to build processes and accounts around these common occurrences.
Once the proper accounts are created, it’s also important to train your staff who will be tracking these expenses to appropriately categorize them. Develop internal processes and common scenarios that are easy to follow and make them accessible to your team.
If you have not already been tracking meals and entertainment this way throughout the year, now is the time to begin working with your employees and accounting partners to prepare for tax season and fully implement this method of tracking for 2020.
For more information on how you can organize your business for tax season, contact Kerkering Barberio at 941-365-4617.
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If you have any questions, please contact your Kerkering Barberio representative.