As more people are venturing out to restaurants, Congress is increasing a business’ tax benefits for doing so. Beginning January 1, 2021, and continuing through December 31, 2022, the amount spent by a business for food and beverages provided by a restaurant will be fully deductible. Prior to this change, the deduction for business meal expenses was limited to 50%, unless an exception (e.g., amounts taxed as compensation, meals incurred at employee recreational or social events) applied.
For this purpose, a restaurant is a business that prepares and sells food or beverages to retail customers for immediate consumption, either on the business premise or as take-out. However, food or beverages purchased from businesses selling prepackaged food or beverages not for immediate consumption (e.g., a convenience store, drug store, vending machine, specialty food store) do not qualify, and those meal purchases would still be subject to the 50% disallowance, unless another exception applies. In addition, the expenses associated with cafeterias located on the business premises of the employer are not affected by this rule.
Entertainment expenses are also not affected by this law change and thus remain nondeductible. However, meal expenses incurred during business entertainment would be fully deductible as long as the cost of food and beverages is separately stated on an invoice, bill or receipt. In addition, there is no deduction for food or beverage expenses that are lavish or extravagant or when the taxpayer or an employee of the taxpayer is not present.
Although the change in deductions may not change behavior, it is important that businesses properly adjust recordkeeping so that food and beverage expenses provided by a restaurant that are now 100% deductible are noted as such in a business’ accounting records. This is also a good time to review all meal expenses to be sure that those coded as subject to the 50% disallowance are not the type of expenses that are exempt from that limitation.
