The treatment of federal income tax on business-related dining and entertainment expenses has been a moving goal. If you are confused about what rules currently apply, I don’t blame you. This column is intended to eliminate confusion. That is an optimistic goal, but here is the reason.
The COVID-19 bailout bill of 2020 has made taxpayer-friendly changes
A taxpayer-friendly change in the CAA – the COVID-19 bailout bill that became law at the end of last year – allows you to reduce the cost of business-related food and beverages by 100% provided by restaurants in 2021 and 2022. “Provided in language” explicitly means that the provisional 100% deduction rule applies equally to sit-and-go meals. Prior to this change, deductions for business meals at restaurants were limited to only 50% of the cost.
However, there are some unanswered questions: Are bars that serve as restaurants? Maybe they do. What about airport lounges? What about the food truck? Nobody know. We are waiting for instructions from the IRS.
What the Employment and Tax Cuts Act (TCJA) said earlier
From 2018 onwards, the Tax Cuts and Jobs Act (TCJA) has permanently eliminated deductions for most business-related entertainment expenses. Before TCJA, you could deduct 50% of the costs of most business entertainment activities. But after changing the TCJA, you can no longer deduct any part of the cost of taking a customer to golf, to play ball or to ride the Ferris wheel. Rat.
What the IRS regulations say
For too long, it remains unclear what the impact of TCJA’s general disallowing of entertainment expenses will be on the deduction of business-related meals. In 2020, the IRS finally enacts the expected regulations. They are written prior to the change. CAAs now allow a 100% deduction for business-related restaurant meals between 2021-2022. Therefore, the rules will need to be updated. Until then, they still provide useful guidance summarized in the rest of this column.
What is considered the cost of food and beverages
Food and drink means all food and beverage items, regardless of whether they’re called meals, snacks or whatever. In return, the cost of food and beverages means the full cost of those items – including any sales taxes, shipping charges and tips.
Why should you insist on detailed receipts from entertainment venues
For the general purpose of not allowing a deduction of entertainment expenses, the term entertainment does not include food and beverages unless: (1) food and drink are provided in conjunction with a recreational activity (e.g. : sausage and beer at a basketball game) and (2) the cost of food and drink is not stated separately.
Therefore, in order to be deducted, food and beverages consumed in conjunction with entertainment must: (1) be purchased separately from the activity or (2) be separately stated on the invoice, bill, or receipts reflect the normal selling price for food and beverages if purchased separately from entertainment or the approximate fair value of the food and drink if they were not purchased separately. Fair enough. Click on detailed receipts from entertainment venues.
Exceptions to the business meal rules
According to the IRS regulations, you can still deduct 50% of the cost of work-related meals, as was the case before the TCJA. However, as stated earlier, you can deduct 100% of the cost of the business meal provided by the restaurant during the period 2021-2022.
All that said, no deductions are allowed for business meals unless:
This expense is not lavish or lavish in any case (no one knows what that means), and
The taxpayer or the taxpayer’s employees are present at the food and beverage supply, and
Food and beverages are provided to a taxpayer or a business affiliate.
Business associate means someone you reasonably expect to transact in your business – such as a customer, customer, supplier, employee, agent, partner or established or prospective professional advisor.
Important point: The rules make it clear that you can deduct 50% of the cost of a work-related meal for yourself (assuming you’re stuck working late at night). You can deduct 100% of the cost if a business-related meal is supplied to you by the restaurant during the year 2021-2022.
When can you deduct your spouse’s food bill?
According to IRS regulations, as a general rule, 50% of the cost of meals (food and beverages) while traveling can still be deducted, as was the case before the TCJA. Or 100% of a restaurant-supplied meal between 2021-2022. The old rules on substantial meal costs still apply. Keep your receipt.
The regulations also reiterate the longstanding rule that food expenses incurred for spouses, dependents or other individuals traveling with a taxpayer to business (or with an official) cannot be deducted. , employees of the taxpayer traveling on business trips), unless the cost would otherwise be deducted by a spouse, dependent or other individual.
For example, meals for your spouse are deducted if he or she works in your unincorporated business and accompanies you on a business trip for good business reasons. A temporary 100% deductible allowance applies to legal business travel-related meals provided by the restaurant for your spouse during the period 2021-2022.
Some lesser known deductions are still available
Prior to TCJA, the following favorable tax law exceptions allowed a 100% deduction for eligible dining and entertainment expenses.
A little-known fact is that these exceptions are still available in the tax world in which we currently live. These longstanding but not necessarily well known exceptions predate the CAA’s provisional 100% deductible allowance for meals related to business by restaurants in 2021-2022.
Your business can deduct 100% of food and entertainment expenses that are reported as taxable compensation to the employee of the recipient. IRS regulations confirm that the exception is still available and that it still covers current entertainment expenses.
Your business may deduct 100% of food, beverage and entertainment costs incurred for recreational, social or similar activities that arise primarily for the benefit of employees other than a multiplier. highly-paid employees (for example, food, drinks, and entertainment at company picnics or company holiday parties that are all welcome to attend). IRS regulations confirm that this exception is still available and that it still covers current entertainment expenses.
Your business can deduct 100% of the cost of food, beverages and entertainment provided to the public (for example, free snacks at car dealerships or free food and music provided at a promotional event open to the public). IRS regulations confirm that this exception is still available and that it still covers current entertainment expenses.
Your business may deduct 100% of the cost of food, beverages and entertainment sold to a customer at full value, including the cost of the facilities involved. IRS regulations confirm that this exception is still available and that it still covers current entertainment expenses. The regulations also confirm that a restaurant or catering business can still deduct 100% of the cost of food and drink purchased related to the preparation and delivery of a meal to a paying customer. money and are consumed at the workplace by employees working in a restaurant or catering business.
Your business can deduct 100% of food and entertainment expenses reported as taxable income for a non-employee recipient on Form 1099 (for example, when a potential customer wins a slot. dinner for $ 10 worth of $ 750 at a sales presentation and given a Form 1099). IRS regulations confirm that the exception is still available and that it still covers current entertainment expenses.
The bottom line
You already have it: several ways your business can deduct 100% of your meal expenses and even 100% of eligible entertainment expenses. Party on.