The recent 2020 stimulus legislation enacted by Congress was signed into law by President Trump in Dec. 2020. Among other things, it changed a provision relating to the deductibility of business meals. Under this change, business meals provided by restaurants in 2021 and 2022 to qualified persons will now be 100 percent deductible by the business. The old law only allowed 50 percent to be deductible.
Here are the details:
- Generally, ordinary and necessary food and beverage expenses of operating your business are deductible for federal income tax purposes. However, the deduction is usually limited to 50 percent of the otherwise allowable expense.
- The new legislation adds an exception to the 50 percent limit for business meals paid for by the business and provided by a restaurant. This new rule applies to expenses paid or incurred in calendar years 2021 and 2022.
- The legislation specifically uses the word “by” (rather than “in”) a restaurant. Thus, making it clear that the new rule doesn’t restrict business meals eaten on a restaurant’s premises. Takeout and delivery business meals provided by a restaurant are also fully deductible.
- Even though the change eliminates the old rule of 50 percent deductible to 100 percent deductible, the legislation didn’t change the old rules for deducting all business meals. Therefore, all the other existing requirements continue to apply. Thus, to be fully deductible by the business:
- The food and beverages can’t be lavish or extravagant.
- You or one of your employees must be present when the food or beverages are served.
- The business must provide the food or beverages to a “business associate.” This means a current or prospective customer, client, supplier, employee, agent, partner, or professional advisor with whom you could reasonably expect to engage or deal in your business.
- If the business provides food or beverages at an entertainment activity (e.g., such as a sporting event, etc.), the food or beverages must be purchased separately from the entertainment. Alternately, the meal expense must be stated on a separate bill, invoice, or receipt. This requirement is because the entertainment portion is still nondeductible, unlike the food and beverages.
- You must document the business meal by recording who was present, the business relationship, and retain receipts.
When it comes to deducting business meals and entertaining business associates, the Internal Revenue Service is very strict about documentation and proof, so remember to document these business expenses contemporaneously.
Please let us know if you would like more information about deducting business meals or any other aspects of the new legislation.