Can I Get a Side of Tax Deduction With That?

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Akiva Schreiber

Write-offs. Deductions. Tax credits. The words all business owners love to hear and actively try and make a reality. When it comes to meal and entertainment expenses, the big question that arises is, "does this qualify as a business expense?” This article explores what meals (and entertainment) are allowed to be deducted, for how much of a tax benefit, and the special circumstances for tax years 2021 and 2022 due to the far-reaching effects of the Covid-19 pandemic.

Meal Expense:
-Typical examples of types of meals:
-Business meals with clients
-Snacks and meals provided by the employer to employees
-Meals as part of business travel or business conventions
-Company-wide office parties and food and drink are provided to the public free of charge

In general, businesses can deduct 50% of the cost of business meals. However, in order for a meal to be considered a qualified business expense, the business owner or an employee of the business must be present during the meal, the expense is not extravagant given the circumstances, and the meal is with a business contact for an ordinary and necessary business purpose. Ordinary is defined as something that is “common and accepted” and necessary is defined as “helpful and appropriate” for the trade or business.

Snacks and meals provided to employees on-site will typically qualify for the 50% deduction as well as meals paid for by the employer while the employee is traveling on business. Any personal meals taken during a business trip must be segregated out of the total meal costs in order to determine the appropriate business deduction.

Company-wide parties and food and drink served to the public are both events that aim to provide goodwill to the beneficiaries. As a special circumstance, the tax code allows 100% of these costs to be deductible. However, the 100% deductibility only remains in effect if the party is for employees and spouses only; if other business clients are also in attendance, the party will revert to the regular 50% business meal deduction status.

Special Covid-19 Deductions:
During the height of the Covid-19 pandemic, restaurants were among the hardest-hit industries as indoor dining and other restrictions severely limited them from operating. Congress was aware of this and in order to help jump-start the industry, they included a provision in the 2021 Consolidated Appropriations Act that enacted a temporary exception to the usual 50% meal deduction limitation. The bill states that any amounts paid or incurred for food or beverages provided by a restaurant from January 1, 2021, to December 31, 2022, can be 100% deducted. The word “restaurant” is key, as the bill only allows this deduction to be applied when businesses purchase food or beverages from a business that prepares and sells food or beverages to retail customers for immediate consumption, whether on their premises or not. This would then exclude from the 100% deduction any food or beverages purchased from a grocery store, convenience store, or drug store etc. since they primarily sell prepackaged food not for immediate consumption.

Entertainment Expense:
Prior to the passage of the 2017 Tax Cuts and Jobs Act (TCJA), 50% of entertainment expenses were also able to be deducted; currently, entertainment expenses cannot be taken as a deduction on the Federal level. However, there are several states that have de-coupled from the Federal TCJA bill will therefore still allow a 50% deduction for unreimbursed entertainment expenses. Please consult your tax advisor as to which states continue to allow this deduction. One last note on this point - when meals are combined with entertainment, such as food delivered to a skybox at a sporting event, a business can take the 50% deduction for the meal as long as the receipt or invoice separately states the meal and entertainment costs.

In conclusion, business meal expenses can typically be deducted at 50% of the cost of the meal provided the meal is attended by the business owner or employee and for an ordinary and necessary business purpose. For tax years 2021 and 2022 only, meals purchased from a restaurant can be deducted 100%. Entertainment expenses are no longer deductible on the Federal level but may be on the State level for those states that de-coupled from the 2017 Tax Cuts and Jobs Act.

Consult with your tax professional/CPA for guidance and assistance.