Although the Tax Cuts and Jobs Act (TCJA) eliminated tax deductions for most business entertainment expenses, you can still write off business meal expenses if certain requirements are met.
Treat your clients to qualified business meals. When appropriate, separate the cost of food and beverage from any entertainment.
To sweeten the pot, the new Consolidated Appropriations Act (CAA), enacted late last year, boosts the allowable deduction for meals provided by restaurants to 100% of cost. In other words, you can deduct the entire cost. But this tax break is only available for a limited time.
In the past, you could deduct 50% of business entertainment expenses “directly related to” or “associated with” your business, including the cost of business meals that preceded or followed a substantial business meeting. In addition, you were able to deduct 50% of meal expenses while traveling away from home or business.
The TCJA generally repeals deductions for business entertainment expenses after 2017. But the TCJA didn’t touch the deduction for business meals while you’re away from home on business, although it was not entirely clear at the time. Later, the IRS issued regulations on deducting food and beverage costs associated with business entertainment.
As before the TCJA, you can deduct 50% of the cost of business meals as long as:
- The expense is an ordinary and necessary business expense paid or incurred during the tax year in carrying on any trade or business.
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages.
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
- If food and beverages are provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment or the cost must be stated separately from the cost of the entertainment.
Accordingly, if you treat a client to a meal and the expense is properly substantiated, you qualify for a business meal deduction. Note that there must be a business purpose to the meal or some reasonable expectation of a business benefit.
For tax deduction purposes, the cost of food and beverages include sales tax, delivery charges and tips that are added to your bill.
IRS regulations provide greater clarity for separating food and beverage expenses from entertainment expenses. They include examples where you can deduct costs when you treat a client to food and beverages at a sporting event.
But you can’t circumvent the rules by arbitrarily inflating amounts charged for food and beverages provided by a restaurant. This applies to expenses paid or incurred from January 1, 2021, through December 31, 2022. So there’s a two year window of opportunity.
In new guidance, the IRS says that this tax break generally applies to restaurants that sell food and beverages for both or either on-site and off-site consumption.
Small Business Tax Strategies