Business Meals 100% Deductible in 2021 and 2022
By Jordan Hobgood
After many businesses experienced great struggle adapting to new ways of serving their clients and facing significant financial uncertainty during 2020, business owners can find some relief in a temporary change to a commonly used deduction. This relief, enacted as part of the Consolidated Appropriations Act, 2021, comes in the form of an increase in the deductibility of business meal expenses from 50 percent to 100 percent if purchased from a restaurant during calendar years 2021 and 2022. The same standard rules apply to deductibility including the meal not being lavish or extravagant, as well as the presence of yourself or employee(s) along with another business associate such as a client, vendor or other employee. Also, the meal must have an “ordinary and necessary” business purpose, which means that business is being discussed during the meal.
The IRS defines “restaurant” as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” Notice 2021-25, released by the IRS, clarifies that a restaurant does not include businesses like grocery stores where pre-packaged food is sold not for immediate consumption. The purchase of such pre-packaged foods by a business remains 50 percent deductible.
Because of workplace changes and the continued impacts of social distancing, the IRS has clarified that food or beverages purchased at a restaurant need not be consumed at the restaurant to be 100 percent deductible. Furthermore, while entertainment expenses remain nondeductible, this disallowance does not apply to food and beverages purchased at an entertainment activity as long as the food and beverages are separately purchased, or their costs are separately stated from the other entertainment expenses.
To more easily keep track of these 100 percent deductible purchases versus those 50 percent deductible, businesses should consider maintaining separate expense accounts for these purchases. Another idea is to develop a system to identify restaurant purchases for “immediate consumption” versus prepackaged food, like office snacks, when recording expenses. Since the 100 percent deductibility of restaurant purchases only applies to expenses incurred after December 31, 2020 and before January 1, 2023, businesses with fiscal year ends will need to be especially mindful of how they identify and track these expenses.
Please note that this temporary increase in deductibility is for federal tax purposes, and the increased deduction may or may not be allowed in the states in which your business operates.
As employees and co-workers begin to gather in person again, businesses should consider this additional benefit of 100 percent deductible meals from restaurants to make the most of upcoming events or meetings.
Please reach out to your trusted tax advisor if you have any questions regarding the impact these new rules have on your business.