As you may recall, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated deductions for business entertainment expenses and reduced the deductible amount for certain types of business meals to 50%.
The latest COVID-19 relief package passed at the end of 2020 reverses some of this and allows a temporary full deduction of certain business meals. Meal expenses incurred in 2021 and 2022 can be 100% deductible with some caveats below.
Congress included this provision to help spur businesses to buy meals, ultimately helping our nation’s restaurant industry. Here are the details you need to know.
What Type of Meals Qualify for the Increased Deduction?
The Consolidated Appropriations Act (CCA) expands Internal Revenue Code Section 274 to allow a full deduction for “food and beverages provided by a restaurant.” It does not clarify whether this applies only to in-restaurant meals or if it would also include takeout or catered meals. It is also unclear whether this only applies to business meals with clients or if it also applies to internal business meals (we will watch for guidance and provide more information as received by the IRS).
Besides being provided by a restaurant, the meal must also meet the following three requirements to qualify for the increased deduction.
- The expense is not lavish under the circumstances.
- The taxpayer or an employee of the taxpayer must be present.
- The meals must be provided to the taxpayer or a business associate of the taxpayer.
How to Account for These Meals
It will be essential for businesses to account for meals and entertainment expenses separately in their chart of accounts during this time. Although entertainment expenses are still non-deductible, it will be beneficial to separate these expenses from your business meal expenses, as they are often mixed together. This will make it easier to identify what is and what is not deductible when the time comes to do your taxes.
If you have any questions or concerns, please don’t hesitate to reach out to your team at MGA.
As always, we are here to make the complex simple.