Deducting Meals and Entertainment Expenses
Deducting Meals and Entertainment Expenses: While the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated many deductions for business meals and entertainment. There are still some deductions available. Most of the deductions are in the form of business meals. There are select exceptions of when a business can also deduct entertainment expenses.
There have been two developments that the IRS has provided guidance on: clarification on certain areas of the rule. Also, how the COVID-19 relief legislation passed before the end of 2020. It temporarily suspends the 50 percent limit on specific business meals.
The Consolidated Appropriations Act of 2020 allows businesses to deduct 100 percent of meals provided by a restaurant during 2021 and 2022. This is in an effort to support the restaurant industry after the struggles in 2020.
Business meals that are not provided by a restaurant can still be 50 percent deducted if business is carried out during the meals. Also if they’re not extravagant or lavish, and a number of other requirements are met. There was some question about meals provided during an entertainment activity since entertainment expenses are largely non-deductible. The IRS has provided some guidance on that matter.
Meals provided at or near the workplace to facilitate overtime work or for the employer’s convenience. Those that were excluded from the employees’ income as “de minimis” fringe benefits are also 50 percent deductible. The TCJA will discontinue most of these deductions beginning in 2026. Benefits will still be excludable from employee income.
The TCJA almost put a stop to deducting costs of activities considered as “entertainment, amusement, or recreation.” Club memberships and the cost of facilities related to recreation, entertainment, or amusement are also non-deductible.
Exceptions to the Rules
There are some exceptions to the rules outlined in the paragraphs above. Businesses can deduct 100 percent of meal and entertainment expenses that are treated as employee compensation. Businesses can also deduct 100 percent of activities like holiday parties, picnics, or other outings if they are primarily for the benefit of general employees rather than owners or management. Meal and entertainment costs for select business employee or stockholder meetings or conferences can be deductible as well. For these types of events, meals are 50 percent deductible, but there are still questions of whether entertainment expenses are fully or 50 percent deductible.
If you have questions about deducting your business’ meals and entertainment expenses, contact us.