2021 Update of Business Meals, Travel Meals and Entertainment ExpensesOctober 14, 2021
Since January 1, 1994, business meals have been deductible at 50% of their cost. Reacting to the pandemic a tax law change now allows for a 100% business meal deduction for meals purchased from a restaurant for 2021 and 2022.
Per IRS Notice 2021-25, “the term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk. The 50-percent limitation of § 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer under chapter 1 for any expense paid or incurred for food or beverages acquired from such a business.”
“In addition, an employer may not treat as a restaurant for purposes of § 274(n)(2)(D), (1) any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income under § 119, or (2) any employer-operated eating facility treated as a de Minimis fringe under § 132(e)(2), even if such eating facility is operated by a third party under contract with the employer as described in § 1.132-7(a)(3).” These two items also continue to be subject to the 50% deduction limitation.
In order to qualify for a deduction by small business accountants, meals must pass three tests:
- The expense is not lavish
- The taxpayer or an employee of the taxpayer is present in the furnishing of the food or beverage
- The food and beverages are provided to a taxpayer or a business associate
Meals during travel also apply the three above tests for deductibility. In addition, as it relates to travel, the taxpayer or employee must substantiate the amount, time, and place and business purpose of the expense. These items are further detailed by documenting the travel time period, and actual destination by city or town. The records should be substantiated by written evidence such as travel logs and trip sheets. Travel meals also benefit under the 100% deductibility for 2021 and 2022.
In all cases regarding meals, required documentation is needed in support of any meal expense. Many Tax Court cases involving meals don’t doubt that the expense occurred but deductions were denied due to lack of record keeping and substantiation. At the very least substantiation should contain the following five components:
- Amount of the expense
- Date of the expense
- Location of the expense
- Business purpose of the meal
- Identification of who was present at the meal
For 2021 and 2022 entertainment expenses continue to be non-deductible. Entertainment as defined by the IRS is “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation.” Examples include entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips.