Taking your clients out to dinner or to a sporting event can be a great way to get to know the people with whom you are doing business and help you develop a closer relationship. Plus, business-related meals and entertainment can be a legitimate business expense (with some exceptions) that you can deduct from your company's income taxes.
That said, the rules for deducting meal and entertainment expenses from your taxes have changed quite a bit over the last few years. And these changes have made understanding exactly what you can (and cannot) write off on your tax return pretty confusing.
In some circumstances, for example, a business-related meal is 100% deductible, while in others, the same meal is only 50% deductible. Yet other times, a business meal is totally nondeductible. It all boils down to a few factors: the meal's purpose, who provides the meal, and who benefits from the meal.
Legislation Brings New Rules
To boost business spending at restaurants following the pandemic, Congress added a provision to the Consolidated Appropriations Act (CAA) passed in December 2020 that makes the cost of business-related meals served in a restaurant 100% deductible—but only for 2021 and 2022. Previously, deductions for business meals at restaurants were limited to 50%.
While lawmakers may have temporarily increased the deduction for business-related meals, they made another change that eliminates your ability to write off most entertainment expenses—and that change is permanent. Starting in 2018, the Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses.
Before the TCJA, you could deduct 50% of the cost of entertaining your clients, such as taking them to a ballgame or treating them to a round of golf. But after the TCJA, you can no longer deduct such expenses. Moreover, while you can deduct the cost of food and beverages consumed in conjunction with an entertainment event, the food and beverages must be purchased separately from the entertainment or stated separately on the bill in order to qualify for a deduction.
Confused yet? We don't blame you. For clarification on the finer details of these changes to the tax code, consult with us, your Family Business Lawyer™, or a Certified Public Accountant (CPA). Meanwhile, here we will highlight a few of the most significant new rules for deducting meal and entertainment expenses for 2021 and beyond.
Deducting Business Meals
You are allowed to deduct the cost of business meals (food and beverages) as a business expense, and in most cases, the meal will be 50% deductible. The cost of the meal equates to the total cost of the food and beverages, including sales tax, tips, and delivery fees.
To qualify for the deduction, you (the business owner) or an employee must be present during the meal, and the meal cannot be “lavish or extravagant.” The IRS does not define “lavish or extravagant;” instead, the agency states that the cost must be “reasonably based on the facts and circumstances.” The IRS also points out that meal expenses will not be disallowed simply because they exceed a certain price or because they take place at a fancy restaurant.
However, as mentioned earlier, the CAA allows you to write off 100% of the cost of business-related meals provided by restaurants and bars from January 1, 2021, through December 31, 2022. This temporary 100% deduction applies to facilities that provide sit-down dining or take-out.
The following are a few examples of situations where you would be able to claim the 50% deduction (or 100% for 2021 and 2022 if the meal is provided by a restaurant) for business meals:
- Dinner with a client where work is discussed
- Employee meals while traveling for business
- Drinks, snacks, and other food items supplied for the office
- Catered food for a board meeting
- Meals you purchase while traveling for business
- Food provided for employees who are working late
- Eating lunch out with a few employees
Fully Deductible Meals
In certain circumstances, some meal expenses are fully (100%) deductible. Examples of fully deductible meal expenses include the following:
- A holiday party for the entire company
- A community event where you provide free food to the general public
- A fundraising event where the proceeds go to a charitable organization
- Food provided as part of employee's taxable compensation (must be included on W-2)
- A dinner out where at least half of all your employees are present
Meal Expenses You Cannot Deduct
Basically, most business-related meals you can think of are either 50% or 100% deductible, but there are some exceptions. For example, if you take a client out to dinner and invite your spouse and kids to come with you, neither your spouse nor your kids' meal expenses can be deducted. The clients' spouse's meal expense would not be deductible, either.
The same restriction would apply for meal expenses incurred by spouses, dependents, or other individuals who accompany you on business trips. The only instance where you could deduct such expenses would be if the spouse, dependent, or other person worked for your company.
Deducting Business Entertainment
As mentioned earlier, following the implementation of the TCJA in 2018, you can no longer deduct most entertainment expenses. Entertainment is defined as “any activity generally considered to provide entertainment, amusement, or recreation,” according to the IRS.
This means you can no longer write off the expenses for taking clients to a basketball game, football game, or other sporting events; bringing employees to a Broadway musical or on a fishing trip, or taking a prospective vendor to a Vegas show. Additionally, you cannot deduct the costs of renting out an “entertainment facility,” which includes things like a yacht, swimming pool, bowling alley, limo, airplane, hotel suite, or villa in a vacation resort.
The same restriction applies to deducting membership and club dues, such as dues for membership to a country club or golf course—these expenses cannot be deducted from your taxes.
As we touched on earlier, while you can no longer deduct most entertainment expenses, you can still deduct the cost of food and beverages consumed in conjunction with an entertainment event, such as hot dogs and beers purchased at a baseball game. However, to qualify for the deduction, you must meet one of two conditions: 1) the food and beverages must be purchased separately from the entertainment, or 2) the cost of the food and beverages must be stated separately on the bill or receipt.
Given this requirement, you should always insist on detailed receipts whenever you visit any entertainment venue for business purposes.
Entertainment Deductions Still Available
In spite of these new restrictions, there are still a few entertainment expenses that you can fully deduct from your taxes. According to the IRS, you can deduct 100% of the cost of the following entertainment-related business expenses:
- Entertainment expenses that are reported on your tax return as taxable compensation to your employees.
- Entertainment expenses for recreational or social activities for your employees, such as a holiday party or a company picnic.
- Expenses related to attending business meetings or conventions of certain exempt organizations, such as business leagues, chambers of commerce, or professional associations.
- Entertainment sold to your customers. For example, if you run a nightclub, and you hold a rock concert, those expenses are not subject to the nondeductible rules.
Keep Track of Your Expenses With Sound Systems
The key to taking full advantage of business-expense deductions, such as for meals and entertainment, is to keep meticulous track of your expenses, and the best way to do that is to implement sound business systems. As your Family Business Lawyer™, we can support you in setting up an array of business systems, not just for managing your finances and taxes, but for dealing with legal and insurance issues as well.
You also need to stay on top of the latest changes to federal and state laws governing business expenses and other tax matters, and we, in tandem with your certified public accountant, can help you with that, too. Contact us today to get started with a LIFT Business Breakthrough Session, where we will examine all of your legal, insurance, financial, and tax needs, and help you put in place the proper systems to make managing these areas of your business a breeze.
This article is a service of R&R Legal Advisors LLC and Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.