Take that Client to Dinner: Business Meals Are Deductible in 2021 and 2022

Business meals at a restaurant are now fully tax deductible — at least for the next two years. To promote increased business spending at restaurants, the “Consolidated Appropriations Act, 2021” directed the IRS to increase the deduction from 50% to 100% of the cost of food and beverages provided by a restaurant.

The IRS had previously issued final regulations about the deductibility of expenses for entertainment or food and beverages as provided in the Tax Cuts and Jobs Act (TCJA). The final regulations disallow deductions for entertainment expenses and limit deductions for food and beverage expenses paid or incurred after December 31, 2017. The final regulations apply to tax years that begin on or after October 9, 2020. 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.

Background

IRC Section 274 disallows or limits deductions for entertainment expenses and food and beverage expenses that otherwise would be fully deductible business expenses. Before the TCJA, IRC Section 274 generally allowed taxpayers to deduct 50 percent of entertainment expenses when entertaining current or potential clients or other business contacts. The TCJA revised this section to generally disallow a deduction for entertainment expenses and to reduce the deduction for expenses for food and beverages provided by employers to their employees. The TCJA, however, did not clarify whether the provision of food and beverages itself constitutes entertainment, and this omission generated confusion about the deductibility of business meal expenses. The final regulations, among other things, clarify what does and does not constitute entertainment.

Entertainment Expenses — Deductions Still Disallowed

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.”

The regulations treat these activities as entertainment “regardless of whether the expenditure for the activity is related to or associated with the active conduct of the taxpayer’s trade or business.” Entertainment may also include the cost of an item that “otherwise is a business expense of the taxpayer, which satisfies the personal, living, or family needs of any individual, such as providing a hotel suite or an automobile to a business customer or the customer’s family.”

Entertainment does not, however, include the cost of items that, while satisfying the personal, living, or family needs of an individual, are “clearly not regarded as constituting entertainment.” For example, expenses such as the cost of a hotel room paid by an employer for an employee to use as lodging while that employee is traveling on business, or the cost of an automobile provided for business even though the employee may use the automobile for routine personal purposes such as commuting to and from work, would not be considered entertainment. Providing a hotel room or an automobile to an employee who is on vacation would, however, be entertainment.

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.

When Are Entertainment Expenses Deductible?

Entertainment expenses that fall into one of the following eight categories generally are 100 percent deductible if the ordinary and necessary rule of Section 162 and the substantiation rules of Section 274(d) are satisfied:

1. Expenses for facilities used in connection with the furnishing of food and beverages primarily to the taxpayer’s employees on the taxpayer’s business premises
2. Expenses treated as compensation to the recipient of the entertainment, amusement or recreation
3. Expenses incurred or paid by a taxpayer that are reimbursed to the taxpayer under a reimbursement or other expense allowance arrangement in connection with the performance of services for another person
4. Expenses for recreational, social or similar activities (including facilities) primarily for the benefit of non-highly-compensated employees
5. Expenses directly related to business meetings attended by a taxpayer’s employees, stockholders, agents or directors
6. Expenses related to attending business meetings of business leagues, chambers of commerce, real estate boards and boards of trade
7. Expenses for goods, services, and facilities made available by the taxpayer to the general public
8. Expenses for goods or services (including the use of facilities) which are sold by the taxpayer to customers

Food and Beverage Expenses

Taxpayers generally may continue to deduct 50 percent of expenses for food and beverages if: (1) the expenses are not lavish or extravagant under the circumstances; (2) the taxpayer, or an employee of the taxpayer, is present at the furnishing of such food or beverages; and (3) the food or beverages are provided to the taxpayer or a business associate.

Travel Meals

Food or beverage expenses paid or incurred while traveling in pursuit of a trade or business are generally subject to the 50 percent deduction limitation as well as the limitations for luxury water transport, education travel, and travel expenses of a spouse, dependent or friend.

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:

1. Treated as compensation by the taxpayer to the recipient of the food or beverage
2. Reimbursed to the taxpayer under a reimbursement or other expense allowance arrangement in connection with the performance of services for another person
3. For food and beverages served at a recreational, social, or similar activity primarily for the benefit of the taxpayer’s non-highly-compensated employees
4. For food and beverages that are provided to and primarily consumed by the general public
5. 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.

If you have questions about taxes for entertainment and food and beverage expenses, contact us. We are here to help.

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