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New IRS Notice 2021-25: Some Business Meal Expenses are 100% Tax Deductible for 2021 and 2022

New IRS Notice 2021-25: Some Business Meal Expenses are 100% Tax Deductible for 2021 and 2022

Let's face it, writing off meals and eligible entertainment expenses for your startup or professional services business can be pretty confusing. Why?Because the federal income tax treatment of business-related meal and entertainment expenses has been a moving target over the last few years. Some things are 100 percent deductible, some are 50 percent, and a few are nondeductible. It all depends on the purpose of the meal or event, and who benefits from it. 

From that company happy hour to a nice steak dinner with your biggest client, I will walk you through the different meal deductions your business can take advantage of so you can save big on your tax return. So, what has changed for the 2021 tax year? 

A 2020 COVID-19 relief bill made taxpayer-friendly changes

The “Taxpayer Certainty and Disaster Tax Relief Act of 2020” (the Act), enacted as part of the “Consolidated Appropriations Act, 2021” (CAA 2021), which increased the business-meal deduction for the cost of food and beverages provided by a restaurant from 50 percent to 100 percent in 2021 and 2022, if certain conditions are met. The IRS on April 8 issued Notice 2021-25(Temporary 100% Deduction for Business Meal Expenses) to provide guidance on the higher limit for deducting business meals.

Business publication MarketWatch reported this new rule from the CAA (the COVID-19 relief bill) allows you to write off 100% of the cost of business-related food and beverages provided by restaurants in 2021 and 2022. The “provided by” language apparently means the temporary 100% deduction rule applies equally to sit-down meals and take out. Before this change, deductions for business meals at restaurants were limited to only 50% of cost.

The notice explains when the temporary 100 percent deduction applies and when the standard 50 percent limit continues to apply for purposes of Section 274 of the Internal Revenue Code. The notice provides important details that should be applied when determining whether an expense qualifies for the larger deduction amount. 

As a refresher, starting on Jan. 1, 2021, through Dec. 31, 2022, a business may claim 100 percent of food or beverage expenses paid to restaurants, assuming the business owner (or employee) is present when provided and the expense is not lavish or extravagant under the circumstances.  For all other entertainment and business-meal expenses, the 50 percent meal deduction would still apply.

What the earlier Tax Cuts and Job Act (TCJA) said

For 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses. Before the TCJA, you could deduct 50% of the cost of most business entertainment. But after the TCJA change, you can no longer deduct any part of the cost of taking clients out for a round of golf, to the ballgame, or for a night to a gentlemans entertainment club. 

What IRS regulations say

For too long, it was unclear what the impact of the TCJA’S general disallowance of write-offs for entertainment expenses would be on the deductibility of business-related meals. In 2020, the IRS finally issued eagerly-awaited regulations. They were written before the CAA change that now allows 100% deductions for business-related restaurant meals in 2021-2022. So, the regulations will still need to be updated. 

What is considered a Food and Beverage cost?

Food and beverages mean all food and beverage items, regardless of whether they are characterized as meals, snacks, or whatever. In turn, food and beverage costs mean the full cost of such items — including any sales tax, delivery fees, and tips.

Why you should insist on detailed receipts from entertainment venues   

The marketwatch article points out that “for purposes of the general disallowance of deductions for entertainment expenses, the term entertainment does not include food and beverages unless: (1) the food and beverages are provided in conjunction with an entertainment activity (for example, hotdogs and beers at a basketball game) and (2) the food and beverages costs are not separately stated.”

In order to qualify for the deduction, food and beverages consumed in conjunction with an entertainment activity must: (1) be purchased separately from the entertainment or (2) be separately stated on a bill, invoice, or receipt that reflects the usual selling price for the food and beverages if they were purchased separately from the entertainment or the approximate reasonable value of the food and beverages if they were not purchased separately. So it is recommended that you insist on detailed receipts from entertainment venues.

Exceptions to the rules about business meals

Business-expense-meals-deduction-2021

According to the IRS regulations, you can still generally deduct 50% of the cost of business-related meals, as was the case before the TCJA. As stated earlier, however, you can deduct 100% of the cost of business meals provided by restaurants in 2021-2022.

All that said, no deduction is allowed for business meals unless:

  1. The expense is not lavish or extravagant under the circumstances,

  2. The taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverages, and

  3. The food and beverages are provided to the taxpayer or a business associate. 

The Marketwatch article also clarifies the term ‘Business associate' to mean a person with whom you reasonably expect to deal with in the conduct of your business — such as an established or prospective customer, client, supplier, employee, agent, partner, or professional adviser.

Key takeaway: The regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself (say because you get stuck somewhere working late at night). 

You can deduct 100% of the cost if the business-related meal is provided to you by a restaurant in 2021-2022.

Some other little-known deductions are still available  

Before the TCJA, the following favorable tax-law exceptions allowed 100% deductibility for eligible meal and entertainment expenses. 

A lesser-known fact is that these exceptions are still available in the tax world that we currently live in. These long-standing but not necessarily well-known exceptions predate the CAA’s temporary 100% deductibility allowance for business-related meals provided by restaurants in 2021-2022. Check out some of these:  

  • Your business can deduct 100% of meal and entertainment expenses that are reported as taxable compensation to recipient employees. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.  

  • Your business can deduct 100% of food, beverage, and entertainment expenses incurred for recreational, social, or similar activities that are incurred primarily for the benefit of employees other than certain highly compensated employees (for example, food and beverages and entertainment at company picnics or company holiday parties that can be attended by all). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.

  • Your business can deduct 100% of the cost of food, beverages, and entertainment that is made available to the general public (for example, free snacks at a car dealership or free food and music provided at a promotional event open to the public). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.  

  • Your business can deduct 100% of the cost of food, beverages, and entertainment sold to customers for full value, including the cost of related facilities. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses. The regulations also confirm that a restaurant or catering business can still deduct 100% of the cost of food and beverage items that are purchased in connection with preparing and providing meals to paying customers and that are consumed at the worksite by employees who work in the restaurant or catering business.  

  • Your business can deduct 100% of the cost of meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, when a potential customer wins a dinner cruise for 10 valued at $750 at a sales presentation and is issued a Form 1099). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.

The meals deduction and entertainment expense table provides you a usable helicopter view of how the rules set various business meals and entertainment tax deductions for 2021 and 2022

To help you get ready, check the table below for what you can do in 2021 and 2022 as the law stands now:

 

 

 Amount Deductible for Tax Years 2021-2022 

 Description

100%

50%

Zero

 Restaurant meals with clients and prospects

X

 

 

 Entertainment such as baseball and football games with clients and prospects

 

 

X

 Employee meals for convenience of employer, served by in-house cafeteria

 

X

 

 Employee meals for required business meeting, purchased from a restaurant

X

 

 

 Meal served at chamber of commerce meeting held in a hotel meeting room

X

 

 

 Meal consumed in a fancy restaurant while in overnight business travel status

X

 

 

 Meals cooked by you in your hotel room kitchen while traveling away from home overnight

 

X

 

 Year-end party for employees and spouses

X

 

 

 Golf outing for employees and spouses

X

 

 

 Year-end party for customers classified as entertainment

 

 

X

 Meals made on premises for general public at marketing presentation

X

 

 

 Team-building recreational event for all employees

X

 

 

 Golf, theater, or football game with your best customer

 

 

X

 Meal with a prospective customer at the country club following your non-deductible round of golf 

X

 

 

 

Conclusion 

So there are now a few different ways your business can deduct 100% of meal costs and even 100% of eligible entertainment expenses.  

The bottom line is this new limited expansion of the deductibility for food and beverage provided by a restaurant appears intended to benefit the restaurant industry and encourage businesses to utilize restaurants for business meals.  While the deduction has been expanded for food and beverage expenses provided by a restaurant, the expansion does not appear to apply more broadly to other section 274 expense limitations and does not address entertainment. 

The IRS guidance also failed to address several issues perplexing employers, For example, how will a consumer determine if a business 'primarily' serves pre-packaged food? In addition to not knowing what the standard is for 'primarily' nor what constitutes pre-packaged food (e.g., does it include food provided in a grab-and-go model?), consumers will need to know the level of activity of a business for which they frequent.

Additional guidance is anticipated, and taxpayers need to check for updates given the limited application of this provision over the next two years in the ever evolving business environment. 

If you have any questions on this chart, please call me on my direct line at 315-361-9696
or click here to contact us. We look forward to speaking with you soon.

 


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