The Changing Meals and Entertainment Deduction

What’s the latest on the meals and entertainment (M&E) deduction? While the costs of eating while doing business, or entertaining clients and prospects, was a big tax write-off for years, the Tax Cuts & Jobs Act (TCJA), signed into law in 2017, curtailed this deduction until recently. At least for now, pandemic relief for businesses has partially reinstated the deduction.

A Little History

In fall 2020, the IRS issued final regulations on business expense deductions for M&E to conform to changes in M&E caused by the TCJA.

Prior to 2017, the deduction was generally limited to 50 percent for food, beverage expenses and entertainment expenditures. So, for example, if you took your staff to a team building lunch or a client to a Charlotte Knights game, you would code your expenses in QuickBooks to M&E, and your tax preparer would know to write off 50 percent of the expenses on your tax return. However, the TCJA generally eliminated the deduction for any expenses related to activities that were considered entertainment, amusement or recreation. These included activities in bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips.

Food was a little different. Though the TCJA eliminated deductions for entertainment, Congress did not amend the provisions related to meals. Taxpayers could, therefore, generally continue to deduct half the cost of food and beverage expenses associated with operating their trade or business as long as “the expense is not lavish or extravagant under the circumstances,” according to the IRS.

Here are some more examples. Sam Smith of Smith Manufacturing invites Ron Jones, a business associate, to the Charlotte Knights game, during which they discuss a proposed business deal. Sam purchases tickets for the two to attend the game. The baseball game is “entertainment;” the cost of the game tickets is a non-deductible expenditure. However, if Sam also buys hot dogs and drinks for himself and Ron from a concession stand, the cost of the hot dogs and drinks – purchased separately from the game tickets – is not an entertainment expenditure, and is not subject to the disallowance. Sam may generally deduct 50 percent of the expenses associated with the food.

Employer taxpayers could also still deduct business expenses related to food and beverages if certain requirements were met: Expenses treated as employee compensation or includable in income of persons who are not employees; reimbursed expenses; or expenses for recreational, social or similar activities primarily for the benefit of employees, among others.

Enter Pandemic Relief

Certum Solutions has carefully followed our clients’ issues during COVID-19, knowing that some businesses truly need relief. Similarly, to help a battered restaurant industry, the U.S. Treasury and the IRS have just issued guidance under the Taxpayer Certainty and Disaster Relief Act of 2020 that added a temporary exception to the 50 percent limit on what businesses can deduct for food or beverages.

Now, for all of 2021 and 2022, businesses can claim 100 percent of their food or beverage expenses paid to restaurants, as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not, again, “lavish or extravagant.”

“Restaurants” include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. They do not include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. In addition, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.

Whether entertaining prospects or paying to feed employees, your business is best off checking frequent changes in regulations for the best tax advantages. Certum Solutions can help you do that, as well as ensuring you account for M&E properly in QuickBooks.