On December 27th, 2020, the IRS created a temporary new tax incentive to allow businesses to deduct more on business-related food and beverage costs. This tax relief measure was created to give much needed support to the restaurant industry hit hard by the COVID-19 pandemic.
Let’s start by reviewing some bad news - The Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses paid or incurred after 2017. This means that businesses can no longer deduct the costs of taking clients to baseball games, golfing or comedy shows. That’s sad ☹️
Now let’s move to some good but temporary news - businesses can now deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022. Previously, deductions for business meals were limited to only 50% of the cost. Yay! They doubled that deduction.
The IRS also provides important guidance on the definition of restaurant meals eligible as 100% deductible. Restaurant meals are meals available for immediate consumption. This includes dine in or take out meals along with any delivery fees, tips and sales tax.
There are few more rules here, so bear with me:
You, as a business owner, or your employee must have to be present during business meal
There are should be at least two parties present during business meal (Unfortunately, ordering UberEats for yourself or going to McDonald's to grab a bite or our favorite working in a coffee shop sipping on a latte doesn't count as business meeting but lunch with contractors/teammates/clients at a sushi place totally does)
The meal expense cannot be lavish or extravagant under the circumstances
Must be purchased from a restaurant (For example, no pre-packaged foods from Whole Foods.)
You must keep a proper record of the business meal:
The amount of expense,
The time and place of the expense,
The business purpose of the expense, and
The business relationship to the taxpayer of the individuals being entertained.
I know it sounds like a lot of work but it can be easily done by taking a picture of the restaurant receipt and making notes in the QBO memo field.
What about meals while traveling for business? 🧐 Under the final regulations, meals while traveling for business have the same rules and record keeping requirements from above, however; solo travel meals purchased from a restaurant are 100% deductible. Just so we’re on the same page, travel, for tax purposes, means your journey is away from your tax home overnight for business.
50% Deductible Meals
Some business meals remained 50% deductible :
Water, coffee, and snacks to your employees at the office or home office (Don't forget you are also an employee, so if you have Nespresso subscription delivered to your home office - great! You can deduct 50% of the cost, lunch delivered to your home office while working - unfortunately no)
What doesn’t qualify as business meals and are not tax deductible :
Prepackaged food and beverages bought at the store or similar facility (ie. grocery store, gas station, packaged meal delivery services)
Meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (so if your wife and kids want to tag along on a business trip to Bora Bora that’s cool but only your portion of expenses should be paid from business account)
Drinks only 😢 (round of shots at the bar is considered an entertainment in the eyes of the IRS. As we know from above, entertainment is no longer deductible)
Now you know everything I know about business meals, so let’s follow the rules and not get audited. Happy Mealing!