Your Business: New Rules for Writing Off Restaurant Meals
A provision in the December 2020 stimulus bill allows businesses to deduct the full cost of food and beverages provided by a restaurant in tax years 2021 and 2022. The standard deduction for most business meals had been limited to 50% of the cost since the Tax Cuts and Jobs Act took effect in 2018.
Offering a 100% deduction for business meals incentivizes spending at restaurants, an industry that was hit hard by the pandemic. The full deduction is available for take-out meals as well as those served at eating establishments.
What Counts as Business Meals?
Meals can be deducted as a business expense if they are associated with the active conduct of a trade or business. This applies to meals for business associates such as current or potential clients, customers, consultants, vendors, and employees, whether they are consumed locally or while traveling.
To qualify for a deduction, there must be a business purpose for the meal, or a substantial business discussion must take place before, during, or after the meal. The taxpayer — or an employee of the taxpayer — must be present, and the cost of food or beverages must not be lavish or extravagant.
Entertainment Is Excluded
The Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses — such as golf outings, cruises, concerts, and sporting events — starting in tax year 2018. Business meals that are provided for clients before, during, or after entertainment events are still deductible, but food and beverage costs must be stated separately from any nondeductible costs (such as tickets or facility charges) on the invoice. The IRS has also warned that the amount charged for food and beverages may not be inflated to circumvent the entertainment disallowance.
There is an exception for recreational or social activities that primarily benefit employees. For example, employers can fully deduct expenses for both meals and activities at a company event such as a summer picnic or a holiday party.
Document Your Expenses
The IRS tends to scrutinize food and beverage deductions closely. If they are challenged, your expenses could be disallowed unless you have books and records that satisfy certain statutory and regulatory requirements. Make sure to keep all itemized invoices and credit-card receipts, as well as notes with the date, amount paid, restaurant name, attendees, and business purpose for each occasion.