While many businesses struggled through the pandemic, none more so than the restaurant industry. In an effort to aid these businesses, the Consolidated Appropriations Act introduced a 100% business meal deduction, formerly 50%. However, many questions surround the new tax credit. Let’s discuss how to use the business meal deduction to its full advantage.
Meals that qualify are considered ordinary and necessary. Ordinary means common and accepted in your business. Necessary implies it would be helpful and appropriate for your business. Congress explains further by saying that this should not include lavish and extravagant expenses. Also, the taxpayer or an employee of the taxpayer must be present at the meal and a bona fide business discussion must take place. This would include business dinners with clients or potential clients. Also, takeout, delivery tips, fees, and sales tax qualify for the 100% deduction.
The temporary 100% deduction is applicable for business meals that take place after December 31, 2020, and before January 1, 2023.
The deductible meal must be purchased at a business that prepares and sells food or beverages for immediate consumption, whether consumed on the business’s premises or not. A store that sells prepackaged food or drinks meant to be consumed at a later time does not qualify. This includes a grocery store, specialty food store, drug store, convenience store, newsstand, vending machine, and a beer, wine, or liquor store.
Entertainment expenses are not deductible, but if you purchase a business meal, let’s say at a baseball game, the meal could qualify for the deduction. It must be purchased separately from the entertainment event and be separately stated on the bill or invoice.
Travel meals qualify for the 100% deduction as long as the taxpayer or employee of the taxpayer is present at the meal and it is for business travel purposes. Also, if a spouse, dependent, or other individual is present, their meal is only deductible if they are also an employee of the business and are on the business trip for business reasons.
The IRS has clarified that an eating facility providing tax-exempt meals to employees on the employer’s premises or an employer-operated eating facility that is treated as a de minimis fringe benefit does not count as a restaurant.
It is important to keep precise and accurate records. Save all receipts and make note of who attended, what it was for, what you discussed, and where it was located. Remember, additional rules may apply in certain circumstances. As always, please contact Alloy Silverstein if you have any further questions or need clarification on this new tax law.
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