IRS Issues Guidance on the Deductibility of Business Meals

On December 27, 2020, the Consolidated Appropriations Act was signed that made changes to the deductibility of business meals for 2021 and 2022. In years prior to 2021 business meals were 50% deductible and entertainment expenses were completely disallowed. Following are the general guidelines that have applied to meals and entertainment expenses.

Meals qualifying for 50% deductibility prior to 2021:

• Meals, not lavish in nature, with a client where business is discussed and documented
• Employee meals at a business conference, separately stated from the conference ticket price
• Employee meals while traveling during business
• Office snacks and meals
• Meals for the convenience of the employer such as meals for occasional employee overtime

Meals qualifying for 100% deductibility:

• Meals included as taxable compensation to an employee
• Meals sold to a client or customer
• Food offered to the public for free
• Office holiday party or picnic
• Team-building events

Entertainment expenses that are not deductible:

• Sporting event tickets
• Any type of club membership
• Meals during an entertainment event that are not separately stated on the invoice

Beginning January 1, 2021 and ending December 31, 2022, meals that were previously 50% deductible can be 100% deductible provided that the meal is provided by a restaurant. This provision of the Consolidated Appropriations Act appears to specifically benefit the restaurant industry. It is important to note that the term “restaurant” is not generally defined in the Internal Revenue Code. Therefore, it would be best to consider the generally accepted definition of a restaurant when making business purchases to secure the deduction.

Expenses and fees associated with restaurant provided food and beverage would also be deductible. The Act states that the full cost of food and beverage, including any delivery fees, tips, and sales tax, is deductible provided that the food and beverage is provided by a restaurant. Therefore, the delivery fee charged by Uber Eats to deliver a meal from a restaurant would be fully deductible.

Following are common examples of expenses that are fully deductible during 2021 and 2022:

• Meals during employee meetings, in the office, if provided by a restaurant
• Meals during business travel if provided by a restaurant
• Meals at a seminar or conference if provided by a restaurant
• Meals with a client if provided by a restaurant

This tax law change can lead to bookkeeping challenges for the next two years. When recording business meal and entertainment expenses it is important to:

• Post expenditures that are strictly entertainment to a separate general ledger account
• Create separate categories for the different food, beverage, and meal expenditures such as:
  • Provided by a restaurant (100% deductible)
  • Other meals not provided by a restaurant (50% deductible)
  • Team building & employee events (100% deductible)

Internal Revenue Code Section 274(k) continues to require that the food and beverage expenditures not be lavish or extravagant in nature, that the taxpayer be present at the meal or event, and that appropriate documentation be maintained to substantiate business purpose.

As with any new tax law or ruling, we expect that there will be continuing commentary and interpretation. We invite you to contact your Cullari Carrico professional if you have questions.