The federal income tax's treatment of business-related food and entertainment expenses has been a moving target. If you are not sure what the current rules are, I cannot blame you. This column is intended to remove confusion. That's an optimistic goal, but here we go.
Tax-friendly changes have been made with a COVID-19 bill for 2020
A tax-friendly amendment to the CAA – the COVID-19 bill that went into effect late last year – allows you to write off 100% of the cost of business-related food and beverages provided by restaurants in 2021 and 2022 "language "Apparently means that the temporary 100% deduction rule applies to both take-away and take-away meals. Before this change, the deductions for business lunches in restaurants were limited to only 50% of the cost.
However, there are some unanswered questions: Do bars that serve food count as restaurants? They probably do. What about airport lounges? What about food trucks? Nobody knows. We are waiting for the IRS guidance.
What the previous Tax Cut and Employment Act (TCJA) said
For 2018 and beyond, the Tax Reduction and Employment Act (TCJA) permanently removed the deductions for most business-related entertainment expenses. Before the TCJA, you could deduct 50% of the cost of most business entertainment. However, after the TCJA switch, you will no longer be able to deduct any part of the cost if you take customers for a round of golf, a ball game or a ride on the Ferris wheel. Rats.
What IRS Regulations Say
For too long it was unclear what effects the general non-admission of amortization depreciation by the TCJA would have on the deductibility of business-related meals. Finally, in 2020, the IRS issued much-anticipated regulations. They were written before the CAA change that will now allow 100% discounts for business-related restaurant meals in 2021-2022. Therefore the regulations need to be updated. Until then, they still offer the useful guides that are summarized in the rest of this column.
What is considered a food and beverage cost?
Food and beverages are to be understood as meaning all foods and beverages, regardless of whether they are characterized as meals, snacks or whatever. Food and beverage costs, in turn, represent the full cost of such items – including sales tax, shipping costs, and tip.
Why should you insist on detailed evidence from entertainment venues?
For the purposes of generally not allowing deductions for entertainment expenses, entertainment does not include food and drink unless: (1) The food and drink are provided in connection with an entertainment activity (e.g. hot dogs and beers at a basketball game). and (2) the cost of food and beverages is not separately disclosed.
To be deductible, food and beverages consumed in connection with an entertainment activity must (1) be purchased separately from the entertainment, or (2) separately identified on an invoice, invoice, or receipt that reflects the normal retail price for the business Food and drink if purchased separately from entertainment, or the approximate fair value of the food and drink if not purchased separately. Fair enough. Insist on detailed evidence from entertainment venues.
Exceptions to the rules for business lunches
Generally, under IRS regulations, you can still deduct 50% of business meal costs, as it was before the TCJA. However, as mentioned earlier, you can deduct 100% of the cost of business lunches offered by restaurants in 2021-2022.
Nevertheless, no deduction is permitted for business lunches unless:
The cost is not wasteful or extravagant (no one knows what that means) given the circumstances, and
The taxpayer or an employee of the taxpayer is present at the delivery of the food and drinks, and
The food and drinks are made available to the taxpayer or a business partner.
Business partner is someone who you would reasonably want to contact in the running of your business, e.g. B. an established or potential customer, customer, supplier, employee, agent, partner or professional advisor.
Key point: The regulations make it clear that you can deduct 50% of the cost of a business meal for yourself (e.g. because you have to work somewhere late at night). You can deduct 100% of the cost if the business meal is offered to you by a restaurant between 2021 and 2022.
When you can deduct your spouse's meals
As a general rule, under IRS regulations, 50% of the cost of meals (food and beverages) can still be deducted on business trips, as was the case prior to the TCJA. Or 100% for restaurant meals in the years 2021-2022. The long-term rules for justifying the food costs continue to apply. Keep receipts.
The rules also reaffirm the long-standing rule that no allowance for meals is allowed for spouses, relatives or anyone else accompanying the taxpayer on business trips (or accompanying an official or employee of the taxpayer on business trips), unless Otherwise, the expenses would be deductible by the spouse, dependent, or other person.
For example, your spouse's meal expenses are deductible if he or she works for your company without legal personality and accompanies you on a business trip for legitimate business reasons. The 100% Temporary Withholding Allowance applies to legitimate business trips offered by restaurants to your spouse during 2021-2022.
Some little-known prints are still available
Prior to the TCJA, the following favorable tax exemptions enabled 100% deductibility for eligible food and entertainment expenses.
A little known fact is that these exemptions are still available in the tax world we currently live in. These long-standing, but not necessarily well-known, exceptions are due to the CAA's temporary 100% deductibility for business-related meals provided by restaurants in 2021-2022.
Your business can deduct 100% of the food and entertainment expenses reported to the recipient's employees as taxable allowance. IRS regulations confirm that this exemption is still available and will continue to cover incidental maintenance costs.
Your company can deduct 100% of the cost of food, beverages, and entertainment incurred for recreational, social, or similar activities that primarily benefit employees other than certain high-paid employees (e.g., food, drink, and entertainment at company picnics) or company holidays that everyone can attend). IRS regulations confirm that this exemption is still available and will continue to cover incidental maintenance costs.
Your business can deduct 100% of the cost of food, drink, and entertainment made available to the public (such as free snacks at a car dealership or free food and music at a publicly available promotional event). IRS regulations confirm that this exemption is still available and will continue to cover incidental maintenance costs.
Your business can deduct 100% of the cost of food, beverage, and entertainment sold to customers at full value, including the cost of associated facilities. IRS regulations confirm that this exemption is still available and will continue to cover incidental maintenance costs. The regulations also confirm that a restaurant or catering company can still deduct 100% of the cost of food and beverages purchased in connection with the preparation and delivery of meals to paying customers and those of employees who work in the restaurant , consumed at the construction site or catering business.
Your business can deduct 100% of the cost of meals and entertainment reported as taxable income on a 1099 Form to a non-employed recipient (for example, if a prospect is doing a sales presentation on a 10-person dinner cruise worth 750 USD wins and a Form 1099 is issued). IRS regulations confirm that this exemption is still available and will continue to cover incidental maintenance costs.
The final result
There you have it: there are a number of ways that your business can deduct 100% of food costs and even 100% of eligible entertainment costs. Celebrate on.