This blog was updated 12/9/21
Over the past few years there have been impactful changes to the rules surrounding the deductibility of meal and entertainment expenses, starting with the Tax Cuts and Jobs Act (TCJA) of 2017 and continuing with the Consolidated Appropriations Act, 2021.
Namely, this most recent act allows for the 100% deduction for business meal expenses incurred after December 31, 2020, through December 31, 2022, if the meals are provided by a restaurant. For this purpose, a restaurant is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether they are consumed on the business’ premises — meaning takeout or ordering lunch in is included in the definition. Restaurant meals do not, however, include pre-packaged foods from grocery or convenience stores, or vending machines.
Previously, the deduction limit was set at 50%. If meals are not provided by a restaurant, the deduction is still limited to 50%. Allowing the full deduction over the next two years is aimed at helping the struggling restaurant industry during the COVID-19 pandemic. Note that entertainment expenses are still not deductible for tax purposes; those rules remain as stated in the TCJA.
Below offers a snapshot comparison of prior versus revised rules for both meal and entertainment expensing.
|
Type of Expense |
Before TCJA |
After TCJA |
After Consolidated Appropriations Act (for 2021 and 2022 only) |
|---|---|---|---|
|
Entertainment (including meals that are included in the price of the entertainment) |
50% Deductible |
Nondeductible |
No Change (Nondeductible) |
|
Business Meals (including meals during an entertainment event that are paid for separately) |
50% Deductible |
50% Deductible |
NEW |
|
Meals Provided for Convenience of Employer |
100% Deductible |
50% Deductible |
NEW |
|
Employee Parties |
100% Deductible |
100% Deductible |
No Change |
|
Payment for Employee Meals While Out of Town for a Business Purpose |
50% Deductible |
50% Deductible |
NEW |
|
Per Diem Meals |
50% Deductible |
50% Deductible |
NEW |
While the rules may seem straightforward, in reality there are many gray areas for businesses to navigate as they record expenses. Below are some scenarios to help illustrate how to interpret the current meal and entertainment expense rules for 2021 and 2022.
Nondeductible as entertainment. These expenses are 100% nondeductible even if they are substantiated as having a business purpose.
There are two scenarios to consider:
Nondeductible as entertainment. These expenses are 100% nondeductible if the meal is included in the price of the entertainment. For example, if a client is taken to a basketball game in a company suite that includes access to food and drinks, and the price of the suite and game ticket includes the price of the food and drinks.
Deductible. If the meals are purchased separately from the entertainment, these expenses are deductible up to 100%. For example, if you buy hot dogs and drinks while at a baseball game, those expenses are fully deductible. Substantiation requirements are the same as under law prior to the TCJA.
Nondeductible as entertainment. These expenses are 100% nondeductible. For example, a happy hour or special event held at a museum for client/customers would fall under this category.
Deductible as a gift. Gifts are limited to $25 per person. The taxpayer is not attending the event so it would not be entertainment expense.
Deductible. The cost of the ticket will reduce the income recognized by the taxpayer for the sale of the ticket.
Deductible as wages. These expenses should be recorded as wages to the employee.
Deductible. These expenses are deductible up to 100%. Substantiation requirements are the same as under law prior to the TCJA.
Deductible. These expenses are deductible up to 100%.
Deductible. These expenses are deductible up to 100%. An example of what falls under this category is when the company brings in dinner for employees so they can work overtime.
Deductible. A “fun” outing plus a meal is still 100% deductible. For example, a holiday party or summer picnic continues to be fully deductible.
Employers should get into the habit of creating separate general ledger accounts to separately record all of the items listed above. This will help ensure the proper tax deductibility treatment is given to each item.
Contact Laura White at lwhite@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.