Don’t miss out on deductions for business meals

Loren Hofer

COVID-19 has changed the way we do business, where we spend money and even how we eat. Some provisions of federal law have changed, too, including a provision allowing for a full tax deduction on business-related food and bevearge expenses incurred in restaurants.

 The pandemic has rocked nearly every industry, but especially food services. According to Datassentials, a food and beverage industry analytics and insights company, more than 10 percent of the nearly 779,000 restaurants in the United States have closed since the onset of the pandemic.

Congress passed the Consolidated Appropriations Act (CAA) in December 2020 to provide fast and direct economic assistance for American workers, families, small businesses and industries. The CAA allows taxpayers to deduct 100 percent of business-related food and beverage expenses incurred at restaurants in 2021 and 2022. Deductions for business meals at restaurants previously were limited to 50 percent of the cost. 

IRS guidance in Notice 2021-25 defines restaurants for the purposes of the deduction to include businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption. However, the definition doesn’t include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if those facilities are operated by a third party under contract with the employer.

In October 2020, the IRS issued final regulations clarifying that taxpayers could still deduct 50 percent of business-related meal expenses under the Tax Cuts and Jobs Act (TCJA). These regulations were written before the CAA change that allowed 100 percent deductions for business-related restaurant meals provided in 2021 and 2022, but they still offer some helpful guidance on the following issues:

n Food or beverages means all food and beverage items, regardless of whether they are characterized as meals, snacks or other types of food and beverages. Food or beverage costs mean the full cost of food or beverages, including delivery fees, tips and sales tax.

n For purposes of the general disallowance rule for entertainment expenses, the term entertainment includes food or beverages only if the food or beverages are provided at or during an entertainment activity — such as a sporting event — and the costs of the food or beverages aren’t separately stated.

To qualify for deduction, amounts paid for food and beverages provided at or during an entertainment activity must be:

Purchased separately from the entertainment.

Or stated separately on a bill, invoice or receipt that reflects the venue’s usual selling price for such items if they were purchased separately from the entertainment or the approximate reasonable value of the items.

Otherwise, the entire cost is treated as a nondeductible entertainment expense. Taxpayers can’t attempt to allocate costs between entertainment and food or beverages.

Under the final regulations, a deduction is allowed for business-related food or beverages only if:

The expense isn’t considered lavish or extravagant under the circumstances.

The taxpayer or an employee of the taxpayer is present at the furnishing of food or beverages.

The food or beverages are provided to the taxpayer or a business associate.

A business associate means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business, such as a customer, client, supplier, employee, agent, partner or professional advisor — whether established or prospective.

Under the final regulations, the long-standing rules for substantiating meal expenses still applies.

The regulations also reiterate the long-standing rule no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual. For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.

Under the new law, for 2021 and 2022, meals provided by restaurants while traveling on business are 100 percent deductible subject to the preceding considerations. 

There are additional circumstances under which your business can deduct 100 percent of the cost of meals, other food and beverages. Taking advantage of this deduction is a benefit to your business and employees. More so, frequenting local restaurants helps keep their staffs employed and boosts local economies. Contact your tax advisor if you have questions or need more information.