Expenses for business related meals are 100% tax deductible with the enactment of the federal Consolidated Appropriations Act last December. However, the change is a temporary measure intended to help the restaurant industry, which has suffered severe economic damage during the COVID-19 pandemic.

Under the law, the temporary full deductibility expires on December 31, 2022, and the federal tax deduction for business related meals will return to the 50% level.

The temporary law specifically applies to business related food and beverages purchased from a restaurant, and the IRS issued Notice 2021-25 to clarify what that means.

The notice defines a restaurant as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” It also explains that:

• Restaurants do not include businesses that primarily sell pre-packaged food or beverages not for immediate consumption, such as a grocery store, specialty food store, liquor store, drug store, convenience store, newsstand, or vending machine kiosk.
• The 100% deduction is allowed at a restaurant if the expense isn’t “lavish or extravagant,” the taxpayer or employee of the taxpayer is present at the meal, and the meal is provided to the taxpayer or business associate such as a customer or client.

Eating facilities located on a business premise or an employer-operated eating facility are not considered restaurants, and business meals purchased from facilities that do not fit the restaurant description remain limited to a 50% deduction. There is some ambiguity related to the notice’s definition of a non-restaurant, but it is unclear if the IRS will provide further guidance.

There are other scenarios where these types of expenses are fully deductible:

• Food and entertainment expenses are 100% deductible for industries that are in the business of providing food, such as restaurants and catering businesses.
• Meals and entertainment expenses related to fundraising events for charities are fully deductible as a charitable deduction.
• Meals and entertainment expenses are also fully deductible when they are in connection with marketing/promotional events, or if they are related to recreational or social events for employees such as a company picnic or holiday party.

It is important to keep track of these different types of expenses to determine their deductibility. One recommendation is to properly categorize these expenses on a general ledger to classify which items are deductible. This will make the tax return preparation process much easier. It is also essential to maintain good records and keep receipts of where the expenses were incurred, with whom, and what items or services were purchased. For example, food and beverage costs that are included with the cost of an entertainment activity are not deductible. But if those costs were purchased separately from the entertainment or are separately stated on a bill, the costs can be allocated and considered tax deductible.

The deductibility of meals and entertainment expenses is continuously being redefined. We will keep you informed of any further changes.

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