New IRS Notice 2021-25: Some Business Meal Expenses are 100% Tax Deductible for 2021 and 2022
Let’s face it, writing off meals and eligible entertainment expenses for your business can be pretty confusing. Why? Because the federal income tax treatment of business-related meal and entertainment expenses has been a moving target over the last few years. Some things are 100 percent deductible, some are 50 percent, and a few are nondeductible. It all depends on the purpose of the meal or event, and who benefits from it.
So from that company happy hour to a nice steak dinner with your biggest client, I will walk you through the different meal deductions your business can take advantage of so you can save big on your tax return. So what has changed for the 2021 tax year?
A 2020 COVID-19 relief bill made taxpayer-friendly changes
The “Taxpayer Certainty and Disaster Tax Relief Act of 2020” (the Act), enacted as part of the “Consolidated Appropriations Act, 2021” (CAA 2021), to promote increased business spending at restaurants, which directed the IRS to increase the business-meal deduction for the cost of food and beverages provided by a restaurant from 50 percent to 100 percent in 2021 and 2022, if certain conditions are met. The IRS on April 8 issued Notice 2021-25 to provide guidance on the higher limit for deducting business meals. The new provision creates a temporary but meaningful tax incentive to spend more on business-related food and beverage costs.
The notice explains when the temporary 100 percent deduction applies and when the standard 50 percent limit continues to apply for purposes of Section 274 of the Internal Revenue Code. The notice “provides important details that should be applied when determining whether an expense qualifies for the larger deduction amount,” wrote Alexis Nash, a partner at accounting and tax advisory firm Wilson Lewis. The expenses must be paid or incurred during calendar year 2021 or 2022, and the relevant food and beverages provided by a restaurant. In other words, the temporary allowance of 100% deductions applies only to food and beverages provided by a restaurant and only for tax years 2021 and 2022. The final regulations will again apply to business restaurant meals after 2022. The Act itself does not specifically extend the full deduction to entertainment expenses.
“As a refresher, starting on Jan. 1, 2021, through Dec. 31, 2022, a business may claim 100 percent of food or beverage expenses paid to restaurants, assuming the business owner (or employee) is present when provided and the expense is not lavish or extravagant under the circumstances. For all other entertainment and business-meal expenses, the 50 percent meal deduction would still apply.”
What the earlier Tax Cuts and Job Act (TCJA) said
For 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses. Before the TCJA, you could deduct 50% of the cost of most business entertainment. But after the TCJA change, you can no longer deduct any part of the cost of taking clients out for a round of golf, to the ballgame, or for night out to a gentleman’s club. Darn.
What IRS regulations say
For too long, it was unclear what the impact of the TCJA’S general disallowance of write-offs for entertainment expenses would be on the deductibility of business-related meals. In 2020, the IRS finally issued eagerly-awaited regulations. They were written before the CAA change that now allows 100% deductions for business-related restaurant meals in 2021-2022. So, the regulations will still need to be updated.
What is considered a Food and Beverage cost?
Food and beverages mean all food and beverage items, regardless of whether they are characterized as meals, snacks, or whatever. In turn, food and beverage costs mean the full cost of such items — including any sales tax, delivery fees, and tips.
2021 meals and entertainment deduction
As part of the Consolidated Appropriations Act signed into law on December 27, 2020, the deductibility of meals is changing. Food and beverages will be 100% deductible if purchased from a restaurant in 2021 and 2022.
Here are some examples:
|Type of Expense
|Entertaining clients (concert tickets, golf games, etc.)
|Business meals with clients at restaurant ( tax years 2021, 2022)
|Office snacks and meals
|Meals & entertainment (included in compensation)
Fully deductible meals and entertainment
Here are some common examples of 100% deductible meals and entertainment expenses:
- A company-wide holiday party
- Restaurant meals with clients and prospects
- Food and drinks provided free of charge for the public
- Food included as taxable compensation to employees and included on the W-2
50% deductible expenses
Here are some of the most common 50% deductible expenses (but for 2021 and 2022, they are 100% deductible if purchased from a restaurant):
- A meal with a client where work is discussed (that isn’t lavish)
- Employee meals at a conference, above and beyond the ticket price
- Employee meals while traveling (here’s how the IRS defines “travel”)
- Treating a few employees to a meal (but if it’s at least half of all employees, it’s 100 percent deductible)
- Food for a board meeting
- Dinner provided for employees working late
Entertainment tax deduction -Still Disallowed
If you were deducting meals and entertainment in previous years, you might have noticed the deduction amounts have changed. The 2018 Tax Cuts and Jobs Act brought a few big changes to meals and entertainment deductions.
The biggest one: entertainment expenses are no longer deductible. Treas. Reg. Section 1.274-11(a) disallows a deduction for entertainment expenses and expenses for any facility used in connection with the entertainment, including dues or fees paid to any social, athletic, or sporting club or organization. “Entertainment” includes activities for “amusement, or recreation, such as entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family.”
Meals Provided with Entertainment
The regulations say that entertainment “does not include food or beverages unless the food or beverages are provided during or at an entertainment activity.” Those costs are generally treated as part of the nondeductible entertainment expenditure unless they are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the cost of the entertainment on the receipt or invoice. The amount charged for the separately purchased items must be the venue’s “usual selling cost” or a reasonable price.
So what’s nondeductible?
Most work-related meal purchases you can think of are either 100 or 50 percent deductible. But there are a few exceptions. For example, if you pay for your clients’ night out but you don’t actually go with them, it’s nondeductible. The same applies to a client meal at a restaurant where you invite friends or spouses—the cost of your friends is nondeductible (but you can write off half the client bill).
And of course, with the Tax Cuts and Jobs Act, client entertainment is also nondeductible—no more golf games or courtside tickets.
Some other little-known deductions are still available
Before the TCJA, the following favorable tax-law exceptions allowed 100% deductibility for eligible meal and entertainment expenses.
Business publication MarketWatch reported that a lesser-known fact is that these exceptions are still available in the tax world that we currently live in. These long-standing but not necessarily well-known exceptions predate the CAA’s temporary 100% deductibility allowance for business-related meals provided by restaurants in 2021-2022. Check out some of these:
- Your business can deduct 100% of meal and entertainment expenses that are reported as taxable compensation to recipient employees. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
- Your business can deduct 100% of food, beverage, and entertainment expenses incurred for recreational, social, or similar activities that are incurred primarily for the benefit of employees other than certain highly compensated employees (for example, food and beverages and entertainment at company picnics or company holiday parties that can be attended by all). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
- Your business can deduct 100% of the cost of food, beverages, and entertainment that is made available to the general public (for example, free snacks at a car dealership or free food and music provided at a promotional event open to the public). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
- Your business can deduct 100% of the cost of food, beverages, and entertainment sold to customers for full value, including the cost of related facilities. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses. The regulations also confirm that a restaurant or catering business can still deduct 100% of the cost of food and beverage items that are purchased in connection with preparing and providing meals to paying customers and that are consumed at the worksite by employees who work in the restaurant or catering business.
- Your business can deduct 100% of the cost of meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, when a potential customer wins a dinner cruise for 10 valued at $750 at a sales presentation and is issued a Form 1099). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
Exceptions to 50 Percent Disallowance of Food and Beverage Expenses
The deduction limitation for food and beverage expenses does not apply to a taxpayer when such an expense is:
- Treated as compensation by the taxpayer to the recipient of the food or beverage
- Reimbursed to the taxpayer under a reimbursement or other expense allowance arrangement in connection with the performance of services for another person
- For food and beverages served at a recreational, social, or similar activity primarily for the benefit of the taxpayer’s non-highly-compensated employees
- For food and beverages that are provided to and primarily consumed by the general public
- For food and beverages sold to customers
As a result, food and beverage expenses that fall into one of these categories generally are 100 percent deductible if they are not lavish or extravagant under the circumstances, and the ordinary and necessary rule of Section 162 and the substantiation rules of Section 274(d) (when applicable) are satisfied.
This limited expansion of the deductibility for food and beverage provided by a restaurant appears intended to benefit the restaurant industry and encourage businesses to utilize restaurants for business meals. The term “restaurant” is not generally defined in the Internal Revenue Code. As a result, much is dependent upon that definition for purposes of this provision. Until such guidance is provided, a best practice could be to consider the general definition of restaurant in developing expense policies and complying with this provision.
Taxpayers frequently wonder whether the expenses for this purpose are broad enough to cover fees in addition to the food and beverage cost. Fortunately, the final section 274 regulations provide that food and beverage expenses include the full cost of food or beverages, including any delivery fees, tips, and sales tax. Based on this definition, delivery fees and tips from a separate food delivery service may be deductible, so long as the food and beverages are provided by a restaurant.
While the deduction has been expanded for food and beverage expenses provided by a restaurant, the expansion does not appear to apply more broadly to other section 274 expense limitations and does not address entertainment. Additional guidance is anticipated, and taxpayers need to check for updates given the limited application of this provision over the next two years in the ever evolving business environment.
If you have questions about taxes for entertainment and food and beverage expenses feel free to reach out for a free consultation.