In 2017, the Tax Cuts and Jobs Act (TCJA) permanently eliminated tax deductions for most business-related entertainment expenses. With this change, the costs of treating a client to a round of golf, trip to the theater, sporting event, or any other entertainment became nondeductible. However, the law did not specifically address the food and beverage costs that often coincide with these entertainment events. This allowed for the continuation of 50% deductibility for food and beverage expenses.
Then, in response to the COVID-19 pandemic’s impact on the restaurant industry, the Consolidated Appropriations Act (CAA) was signed into law in late 2020. This law, enacted as an incentive for businesses to spend more at restaurants, has temporarily increased the deductibility of many business-related meals from 50% to 100%.
These deductibility changes have caused uncertainty for taxpayers on what can be deducted, when, and how much. Read on to gain a better understanding of the tax deduction rules for business-related entertainment and meals.
When and Where do CAA Deduction Rules Apply?
Thanks to CAA, taxpayers can now deduct 100% of business-related food and beverage expenses incurred at restaurants. CAA is in effect for the years 2021 and 2022.
To qualify for the tax break, IRS guidance in Notice 2021-25, released in April 2021, defines “restaurants” as:
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- Businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption
- Not businesses that primarily sell pre-packaged goods not for immediate consumption (e.g., grocery and convenience stores)
- Not employer-operated eating facilities (even if operated by a third party under contract with the employer)
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Are Pre-CAA Deduction Rules Still Relevant?
The IRS issued final regulations under TCJA regarding business-related meal costs in October 2020. Although this was written before the CAA changes, it provided some useful guidance and clarification that is still applicable.
First, the Pre-CAA regulations provide a definition of food and beverage costs. The regulations apply to all food and beverage items, no matter if they’re classified as meals, snacks, or other types of food and beverages. The deductions apply to the total cost of food and beverages purchased, which includes any delivery fees, tips, and sales tax.
The TCJA regulations also created guidelines for the treatment of food and beverages provided with entertainment. To be deductible, the amounts paid for food and beverages provided at or during an entertainment event must be purchased separately from the entertainment. The amounts should be separately stated on a bill, invoice, or receipt. If the food and beverages are purchased along with the entertainment, the taxpayer cannot attempt to allocate costs between them. The entire cost would be treated as a nondeductible entertainment expense.
Whether accompanying an entertainment event or not, the October 2020 TCJA regulations repeat long-standing stipulations that must be followed for business meals to be considered tax deductible. For any business-related food or beverage purchases, a deduction is allowed if:
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- The expense is not extravagant or lavish given the circumstances
- The taxpayer or an employee of the taxpayer is present when the food or beverages are provided
- The food and beverages are provided to the taxpayer or a business associate
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Per the regulations, a “business associate” is someone with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business. This could include an established or prospective customer, client, supplier, employee, agent, partner, or professional advisor.
Finally, these regulations define the conditions for the treatment of meals while traveling on business. Under the new law, restaurant meals provided while traveling on business are 100% deductible for 2021 and 2022, subject to the following long-standing conditions:
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- Business travel meal expenses must be substantiated to be deductible
- No deductions are allowed for meal expenses incurred for spouses, dependents or others accompanying the taxpayer (or officer or employee of the taxpayer) on business travel
- Unless otherwise deductible by the spouse, dependent or other individual – for example, the spouse works in the taxpayer’s business and is present for business reasons
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Boulay Can Help
There are numerous circumstances in which your business may be able to deduct 100% of the expense related to food and beverages that occur in conjunction with your business efforts. To gain clarity on how these laws apply to you, contact a member of our tax team at 952.893.9320 or learnmore@boulaygroup.com.