Feast on Bigger Tax Deductions for Business Meals
Uncle Sam is helping to pick up the tab for certain business meals in 2021 and 2022. Under a provision in the Consolidated Appropriations Act (CAA), the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants for the 2021 and 2022 tax years.
So, you can take a client out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges. The IRS issued guidance on this tax break early last year and just followed up with additional clarifications for per diem arrangements.
Three More Shots at the 100% Deduction
IRS Notice 2021-25 clarifies that the 100% deduction for business meals is also available in the following three situations:
1. The taxpayer is in the business of providing food such as restaurants and catering businesses,
2. The meals are related to fundraising events for qualified charitable organizations, and3. The meals are incurred in connection with marketing or promotional events or are related to recreational or social events intended for employees (such as a company picnic or holiday party).
Despite a crackdown on deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
Currently, the deduction for business meals is allowed if the following requirements are met:
- The expense is an ordinary and necessary business expense paid or incurred during the tax year in carrying on any trade or business.
- The expense isn't lavish or extravagant under the circumstances.
- The taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished.
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
In the event that food and beverages are provided during — or at — an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there's a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sell food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out or delivery meals.
However, a "restaurant" does not include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales from the following businesses are specifically excluded:
- Grocery stores,
- Convenience stores,
- Specialty food stores,
- Beer, wine or liquor stores,
- Newsstands, and
- Vending machines or kiosks.
The restriction also applies to an eating facility located on the employer's business premises and used to provide meals excluded from an employee's taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn't matter if a third party is operating the facility under a contract with the business.
As before, the meals can't be lavish or extravagant under the circumstances. But that doesn't mean you have to skimp. You can still go first-class as long as you don't go over the top.
IRS Notice 2021-63 provide additional clarification for meals paid under per diem arrangements. Notably, for these purposes only, a business taxpayer may treat the meal portion of a per diem rate or allowance paid or incurred after 2020 and before 2023 as being attributable to food or beverages provided by a restaurant.
For fiscal year 2022, which starts on October 1, 2021, the per diem rates for business travel under the "high-low" method are as follows:
- $296 for post-September 30, 2021, travel to high-cost areas within the continental United States (consisting of $222 for lodging and $74 for meals and incidental expenses), and
- $202 for post-September 30, 2021, travel to all other areas within the continental United States, (consisting of $138 for lodging and $64 for meals and incidental expenses).
The notice is effective for expenses incurred by an employer, self-employed individual or employees during 2021 and 2022.
Recordkeeping Is Essential
It's important to keep track of expenses to maximize tax benefits for business meal expenses and to facilitate tax return preparation. Start by properly classifying expenses on your general ledger. In addition, ask restaurants to divvy up the tab between entertainment vs. food and beverages.
For meals, you should record the:
- Cost of each separate expense;
- Name and location of the meal;
- Business purpose; and
- Relationship of persons entertained including occupations and names that show the business relationship.
For additional information, contact your tax advisor. The tax law in this area is continuing to evolve, and the IRS may release additional guidance and clarifications of the current rules.