Changes were made to what businesses could or couldn’t claim as deductible in regard to business meals and entertainment expenses in the 2017 Tax Cuts and Job Act. IRS clarification on the Act’s guidelines define “entertainment” as not including food or beverages unless the aliment was provided at or during an entertainment activity and the costs are not separately stated from the entertainment costs. This clarification regarding deducting meals and entertainment is valid for 2020 tax returns.
For the tax years 2021 and 2022, changes to deductions for business meals were made through the COVID-19 Relief Bill signed on December 27, 2020. Meals that have only been eligible for a 50% deduction will be fully deductible. Food and beverages purchased from a restaurant will be 100% deductible with the goal of stimulating the restaurant industry after the devastating effects of the pandemic.
Examples of deductible and non-deductible items follow, including updates made by the recent relief bill:
- Tickets to sporting events
- Transportation expenses to/from business meals with clients
- Club memberships and other club-related expenses
- Meals purchased during entertainment that are not listed separately on the invoice.
50% Deductible in 2020:
- Meals for the convenience of an employer (meals for infrequent employee overtime) (***100% deductible in 2021 and 2022 if meals are provided by a restaurant)
- Coffee, water, and snacks kept in-office
- Meals provided in charitable sports packages (***100% deductible in 2021 and 2022)
Unchanged by The 2017 Tax Cuts and Job Act:
- Meals had in-office during meetings (50% deductible) (***100% deductible in 2021 and 2022 if the meals are provided by a restaurant)
- Meals during travel for business reasons (50% deductible) (***100% deductible in 2021 and 2022)
- Meals provided at a seminar or conference (50% deductible) (***100% deductible in 2021 and 2022)
- Meals included as taxable compensation to an employee or independent contractor (100% deductible)
- Meals sold to a client or customer (100% deductible)
- Food offered to the public for free (100% deductible)
- Food provided at an office holiday party or picnic (100% deductible)
- Client business meals (50% deductible if the taxpayer is present and the meal is not lavish or extravagant) (***100% deductible in 2021 and 2022)
- Food provided at team-building events (100% deductible)
To ensure that you are legally maximizing your savings, be conscious of your spending and bookkeeping habits year round, not just when the time comes to file your taxes. Make it easy to separate entertainment expenses from others by creating separate accounts and flagging meal expenses. This can be done for travel expenses and accompanying meals. Take note of meals provided for company events, too.
Need help deducting meals and entertainment from your business’s taxes? Contact Insogna CPA today for help minimizing your taxes as much as legally possible.