The deductibility of business meals and entertainment for federal income tax purposes has received renewed attention in recent months. The IRS's final regulations on the deductibility of such expenses under the Tax Cuts and Jobs Act (TCJA) and a provision in December 2020's Consolidated Appropriations Act (CAA) change the rules of the game. Here is what you need to know.
TCJA and CAA developments
The TCJA generally prohibits all deductions for expenses related to entertainment. But taxpayers originally were confused over whether it also banned the 50% deduction for qualified food and beverage expenses.
Under the final regulations, the term "entertainment" does not include food or beverages unless the items are provided at or during an entertainment activity. Even those costs are deductible if purchased separately or stated separately from the entertainment costs on one or more bill, invoice or receipt.
The amount charged must reflect:
- The venue's usual selling cost for such expenses if purchased separately from the entertainment; or
- The approximate reasonable value of the items.
The final regulations also specify that food or beverages must be provided to someone who the "taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner or professional adviser, whether established or prospective." As a result, the deduction is available for employer-provided meals.
Fully deductible meal expenses
Notably, the CAA permits a full 100% deduction for business meals in 2021 and 2022 as long as the expense is for food or beverages provided by a restaurant. Food and beverage expenses must not be lavish or extravagant and the taxpayer or an employee must be present.
The final regulations specify that, among other things, the 50% business meal deduction generally does not apply to expenses treated as compensation, reimbursed food and beverage expenses, and expenses related to recreational, social or similar activities for employees that do not favor highly compensated employees. One example is holiday parties. These expenses are fully deductible. However, this does not include free food and beverages left out in break rooms or provided for the convenience of the employer — such as that offered to employees who must stay on call for emergencies.
The long-term fate of many of the TCJA's tax breaks remains unclear with the White House and Congress under Democratic leadership. The rules are complicated; contact your ORBA advisor to learn more about developments that could affect your federal tax liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.