This year new business expense relief is coming from the federal government. Under a new COVID-19 relief provision, the standard 50% deduction for business meal costs has been doubled to 100% for any food and beverages bought at restaurants for 2021 and 2022.
This increase means the entire cost of customer meetings at your favorite local cafe could qualify as write-offs. Related expenses, such as sales tax, tips, and delivery charges, are also included.
Business meal deduction guidelines
The Tax Cuts and Jobs Act (TCJA) had eliminated the deductions for business entertainment expenses after 2017, but business owners could still enjoy a 50% deduction on qualifying business meals. This tax break included meals while traveling for business or while away from home.
The motivation behind this latest increase to 100%? To aid restaurant owners who have struggled financially during the past two years because of the pandemic. The Consolidated Appropriations Act is doubling this business meal deduction temporarily. Unless Congress decides to extend this tax break beyond 2021 and 2022, it will sunset on December 31st of this year.
Currently, the deduction for business meals is allowable under the following circumstances:
- It is a usual expense your business typically pays to conduct business or trade during the year.
- The meal can't be overly extravagant or lavish for any reason.
- The taxpayer or one of their employees is present at the meal.
- Only prospective or existing business customers, consultants, clients, or similar business contacts receive the meal.
If the meal is part of a larger entertainment event, purchase the food and drinks separately or have them itemized on the primary bill.
As you can see, taking clients out for business meals could qualify for a 100% tax deduction if you follow the guidelines mentioned above.
Restaurants have to provide the meals
One of the main goals of this deduction is to support restaurants. Guidance also allows purchasing food and beverages from these establishments for immediate consumption or off the premises. This means you can have lunch delivered to your office instead of disrupting a sales meeting to go out to eat.
Keep in mind that the IRS's use of the word “restaurant” doesn’t include a business that only offers pre-packaged meals that cannot be eaten immediately on the premises. Specifically, food and beverage sales are excluded from certain companies, such as:
- Convenience stores
- Gas stations
- Grocery stores
- Beer, wine, or liquor stores
- Vending machines or kiosks
If you have an onsite cafeteria at your workplace, these meals are typically excluded from an employee’s taxable income. If you opt to buy business meals from such facilities, you can only claim a 50% deduction. This rule applies even if your food service is operated by a third-party company contracted by your company.
Maintain detailed expense records
As you would with any other business expense, you should keep detailed records of your business meal costs to ensure maximum tax benefit at the end of the year.
You should record the below pieces of information:
- Date
- Itemized cost of every expense
- Name and location of the restaurants used
- Business purpose of the meal
- Business relationship of those fed
You should also ask establishments to divide up the tab between entertainment costs and costs for food or beverages. Contact your tax advisor for more information.
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