The newly introduced Consolidated Appropriations Act became law in December 2020. It contained a new tax relief measure that increased deductions for business meals from 50 percent to 100 percent for this year and the next. This business deduction covers the cost of food and beverages provided by a restaurant, but it doesn’t include prepackaged grocery meals.
The Internal Revenue Code Section 274 provides further explanations on when a business can use the temporary 100% business meal deduction and when the standard 50% deduction will apply. The IRS issued Notice 2021-25 to ensure business owners can understand clearly when their meals will qualify for the larger deduction.
Let’s discuss how business owners and employees can use the reinstated tax deductions to their advantage.
The Temporary 100% Deduction and Its Benefits
Many people have viewed the temporary 100% business meal deduction in a favorable light. It’s a tax incentive offered by the government to business owners on their business-related food and beverage costs.
This new tax break is intended to allow restaurants and dining establishments to survive the current economic crisis due to the COVID-19 pandemic. The restrictions imposed by the government during lockdowns to prevent the spread of the virus have majorly impacted restaurants, bars, pubs, and other food places, so this tax-saving measure is seen as a welcome relief.
The Food and Beverage Costs Than Are Qualified for Deduction
The temporary deduction allows all food and beverage costs related to a business meal to be deducted as long as the business owner or an employee of the business is present during the meal. The items are not considered too lavish or extravagant.
The business meal costs include all food and drink items, regardless of whether they come into the category of proper meals, or snacks, or other types of food and beverages. The meal costs would also include all tips given to service people, the delivery fees charged by restaurants, and the sales tax applied to the total bill.
Business Meals Taken with Entertainment
In the Tax Cuts and Jobs Act or TCJA, all deductions for business-related entertainment activities paid for or incurred after 2017 were permanently eliminated. This means business owners could no longer deduct the expenses of taking their clients out to a football game, to the theater, for a round of golf, etc.
This general disallowance of entertainment deductions means that entertainment costs will not include the food and beverages costs unless the food and beverages are offered at an entertainment event such as a sports game or the price for meals is not separately stated.
Hence, if a business owner wants to utilize deductions on food and beverages provided during an entertainment activity, then the meals must be purchased separately from the entertainment.
The business meal costs must have a separate bill, invoice, or receipt as evidence that would state the selling price of the food items as charged by the venue where the entertainment activity is being held.
If you would like to consult with a tax enrolled agent about the deductibles for your small business, contact Advance Tax Defense and Accounting. We’re an accounting firm with a team of tax professionals based in West Palm Beach, Florida. We offer tax planning, bookkeeping, and business financial planning services. Get in touch with us today.