Back in June, we did a show on the new meals and entertainment rules. There has been some recent guidance on this issue that I want to discuss today.
Let’s go back a little bit and talk about the old rules
- Prior to 1/1/21, a business could not take a deduction for entertainment expenses, but it could take a 50% deductions or any meals expenses incurred.
- While you still cannot take any deduction for entertainment expenses, there was a temporary change the deductibility of the meals expenses.
What was the change?
- The tax law changed to allow for meals to be deductible at 100% for expenses incurred in 2021 and 2022 only.
- The tax law said that the 100% deduction applied to any food purchases from restaurants only.
- And as we know there are a lot of other sources for food and beverage.
So what did they end up saying?
- The tax law limited the deduction for a restaurant that prepares and sells food or beverage to retail customers for immediate consumption on the business premises.
- They later clarified this to say that a to-go order or a drive through also qualifies.
- They also said that a place that sells food on a take-out basis or a food truck would qualify.
- So you don’t have to eat inside the restaurant.
What doesn’t it include?
- It does not include a business that primarily sells pre-packaged foods not intended for immediate consumption.
- Examples of this would be grocery stores, convenience stores and liquor stores.
- It also does not include vending machines or kiosks.
In know many businesses use a meal per-diem. Is that 100% deductible?
- As a quick refresher, a number of years ago the IRS made it easier to reimburse an employee for meals expense.
- Rather than have the employee submit a bunch of receipts, they are allowed to get reimbursed a set amount per day. This amount is different depending on what city you are in.
- Getting back to your question….based on an IRS Notice just recently, per-diems do qualify for the 100% deduction as long as you follow the per-diem rules.
- This was a major change since many commentators thought it would be the opposite and no deduction would be allowed.
Are there other meals expenses that can be 100% deductible?
- Yes, prior to this law and now, a business can deduct 100% of the business meals if it is a
- Companywide holiday or other party
- Food or drinks provided free of charge for the public
- Food that is included in taxable wages of an employee.
Did these rules make any changes to entertainment expenses?
- As I mentioned earlier, they did not. Entertainment expenses are still not deductible.
- But if there is a separate meals component, those meals expenses would apply.
- If there is just one bill that does not separate the bill, then it becomes difficult to deduct any meals portion.
Be sure to talk to a tax professional if you have any questions about the new meals and entertainment rules.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
