The federal income tax treatment of business-related dining and entertainment expenses has been a shifting target. If you are confused about the rules that currently apply, I don’t blame you. This column is intended to eliminate confusion. That’s an optimistic goal, but there it goes.
A 2020 COVID-19 relief bill made taxpayer-friendly changes A taxpayer-friendly change in the CAA, the COVID-19 relief bill that became law late last year, allows you to cancel 100% of the cost of business-related food and beverages provided by restaurants in 2021 and 2022. The language “provided by” apparently means that the temporary 100% deduction rule applies equally to take-out and take-out meals. . Before this change, restaurant business meal deductions were limited to just 50% of cost. However, there are some unanswered questions: Do bars that serve food count as restaurants? Presumably they do. What about the airport lounges? What about food trucks? Nobody knows. We await guidance from the IRS. What the Previous Tax Cuts and Jobs Act (TCJA) Said For 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses. Before 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 to a round of golf, the ball game, or a ride on the Ferris wheel. Rats What IRS Regulations Say For too long, it was unclear what the impact of the TCJA’s blanket denial of entertainment expense cancellations would be on the deductibility of business-related meals. In 2020, the IRS finally issued long-awaited regulations. They were written before the CAA change that now allows 100% deductions for business-related restaurant meals in 2021-2022. Therefore, it will be necessary to update the regulations. Until then, they still provide helpful guidance outlined in the rest of this column. What is considered a food and beverage cost Food and beverage refers to all food and beverages, regardless of whether they are characterized as meals, snacks, or whatever. In turn, food and beverage costs mean the total cost of those items, including sales taxes, shipping fees, and tips. Why you should insist on itemized receipts for entertainment venues For the purposes of general denial 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, hot dogs and beers at a basketball game) and (2) food and beverage costs are not listed separately. Therefore, to be deductible, food and beverages consumed in conjunction with an entertainment activity must: (1) be purchased separately from entertainment or (2) indicated separately on an invoice, invoice, or receipt that reflects the usual selling price of entertainment. food and beverages if purchased separately from entertainment or approximate fair value of food and beverages if not purchased separately. Fair enough. Insist on itemized receipts for entertainment venues. Exceptions to the rules about business meals According to IRS regulations, you can generally deduct 50% of the cost of business-related meals, as was the case before the TCJA. However, as stated above, you can deduct 100% of the cost of business meals provided by restaurants in 2021-2022. All that said, no business meal deduction is allowed unless: The expense is not lavish or extravagant under the circumstances (no one knows what that means), and The taxpayer or an employee of the taxpayer is present at the supply of food and drinks. , and Food and beverages are provided to the taxpayer or business partner. Business associate means a person with whom you reasonably expect to deal in the conduct of your business, such as an established or potential customer, customer, supplier, employee, agent, partner, or professional advisor. Key point: the regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself (for example, because you get stuck somewhere working late into the night). You can deduct 100% of the cost if a restaurant provides you business-related food in 2021-2022 When you can deduct your spouse’s meals Under IRS regulations, the general rule of thumb is 50% of the cost of meals (food and beverages) while traveling on business can still be deducted, as was the case before TCJA. Or 100% for meals provided in restaurants in 2021-2022. Long-standing rules for checking food expenses still apply. Save your receipts. The regulations also reiterate the long-standing rule that no deductions are allowed for meal expenses incurred by spouses, dependents, or others who accompany the taxpayer on business trips (or accompany an official or employee of the taxpayer on business trips). , unless the expenses otherwise, will be deductible by the spouse, dependent or other person. For example, your spouse’s food expenses are deductible if he or she works in your unincorporated business and accompanies you on a business trip for legitimate business reasons. The 100% temporary deduction applies to legitimate business travel related meals provided to your spouse by restaurants in 2021-2022. Some Little-Known Deductions Still Available Before TCJA, the following favorable tax law exceptions allowed a 100% deduction for eligible meal and entertainment expenses. A little known fact is that these exceptions are still available in the tax world we live in today. These long-standing, but not necessarily well-known, exceptions predate the CAA’s 100% temporary deductibility allowance for business-related meals offered by restaurants in 2021-2022. Your business can deduct 100% of the reported meal and entertainment expenses as taxable compensation to receiving employees. IRS regulations confirm that this exception is still available and still covers applicable entertainment expenses. Your company may 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 paid employees (for example, food and beverage and entertainment at company picnics or company parties that everyone can attend). IRS regulations confirm that this exception is still available and that it still covers applicable entertainment expenses. Your business can deduct 100% of the cost of food, beverages, and entertainment that are made available to the general public (for example, free snacks at a car dealership or free food and music at a promotional event open to the public). IRS regulations confirm that this exception is still available and that it still covers applicable entertainment expenses. Your business can deduct 100% of the cost of food, beverages, and entertainment sold to customers for the full value, including the cost of related facilities. IRS regulations confirm that this exception is still available and still covers applicable entertainment expenses. The regulations also confirm that a restaurant or caterer can still deduct 100% of the cost of food and beverages that are purchased in connection with the preparation and provision of meals to paying customers that are consumed on the spot. I work for the 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 recipient who is not an employee on a Form 1099 (for example, when a potential customer wins a 10-fold dinner cruise valued at $ 750 in a sales presentation and a Form 1099 is issued). IRS regulations confirm that this exception is still available and that it still covers applicable entertainment expenses. The bottom line There you have it: several ways your business can deduct 100% of your meal costs and even 100% of your eligible entertainment expenses. Party in.