2021 Changes to the Deductibility of Meals and Entertainment Expenses
August 2, 2021
In the past year, restaurants have struggled across the United States due to shutdowns in 2020 followed by capacity restrictions. In an effort to inject capital into businesses that were hit the hardest, the Consolidated Appropriations Act (CAA) was passed in 2021. The CCA was created in response to the global COVID-19 pandemic, and it changed the deductions for meals and entertainment expenses. Meals that were previously only 50% deductible under the Tax Cuts and Jobs Act of 2017 are now 100% deductible. Below we review several situations in which meal expenses are now 100% deductible.
What did NOT change?
Entertainment expenses, which are expenses incurred for entertainment, recreation, or amusement are still not considered tax deductible. However, if you choose to provide food and beverages during the recreational event, those expenses are now 100% deductible if they meet a few requirements. The food and beverages must be purchased separately at the entertainment venue, or the food and drink expense must be listed separately from the cost of the entertainment. For example, if you were to take your employees to a baseball game, the price of the tickets would not be deductible but the price of any food or beverages purchased at the ballpark for you and your employees would be. In addition, the food and beverage expenses must not be lavish or extravagant and the taxpayer must be present at the time of consumption.
What DID change?
Before the CCA was created, a 50% limitation was applied to most food and beverage expenses after the Tax Cuts and Jobs Act of 2017 (for more information on that, see our article here). The CCA eliminated this limit for food or beverages provided by a restaurant if the expense is incurred between December 31, 2020, and January 1, 2023. In other words, meals expenses will NOT be limited to 50% for any expenses incurred in calendar years 2021 and 2022 if purchased at a restaurant. The IRS defines a “restaurant” as a business that prepares and sells food or beverages to retail customers for immediate consumption. In this definition by the IRS “food or beverage expenses” means the full cost of food or beverages, plus tips, delivery fees, and sales tax. The food or beverage does not necessarily have to be purchased on the restaurant’s premises to qualify for the 100% deduction. This means food ordered from applications like UberEats, GrubHub, and DoorDash will also qualify for 100% deductibility.
The IRS specifically mentions several exceptions to the 100% deductibility of meal expenses. Restaurants do not include businesses that sell primarily pre-packaged food or beverages not for immediate consumption. Some examples of businesses that do not fall under the IRS’s definition include grocery stores; drug stores; beer, wine, or liquor stores; convenience stores; vending machines; newsstands or kiosks. Any food or beverage purchased from these businesses will continue to be limited to 50%. This means if you purchase snacks or other items for employees to eat at their convenience, or if you order these items from applications like Instacart, they will only be 50% deductible.
There are significant opportunities to reduce your tax liability with the increase in the deduction for meals. Despite the limitation on what meals can be fully expensed, Congress has essentially authorized a full deduction of meals for every employer who eats out at a restaurant. Whether for client meetings or on a business trip or just out of convenience between jobs, the full deduction of meals purchased from restaurants for immediate consumption provides a unique opportunity to easily reduce your taxable income.