COVID-19 seems to be throwing up new challenges for businesses every day. Given the changing scenario, the federal government is modifying the relief provisions from time to time.
As a rule of thumb, the majority of the operating expenses in a business are deductible. However, the extent of deduction may vary for different expenses.
The IRS, however, does not allow 100% deduction for certain business expenses, such as entertainment expenses.
In this article, we will study the latest changes to meal and entertainment expenses. In addition, we explain to what extent businesses can take a tax break in the years of 2021 and 2022.
We will discuss the meal and entertainment provisions separately for the sake of clarity. The recent updates to these provisions are mentioned below.
Business Meal Deduction:
Food and beverage expenses incurred while running a business are deductible. However, the amount of deduction was limited to 50% of the eligible expenses for 2020.
The new provisions have increased the limit from 50% to 100% for certain business meals by restaurants for 2021-2022. This measure is to help the struggling restaurants and food chains to sustain themselves during the pandemic and encourage business spending for food.
Meals that are 100% deductible are as follows:
- Restaurant meals with clients and prospects for business purposes.
- Meals for employees for a business meeting purchased from a restaurant.
- Meals served at a Chamber of Commerce meeting conducted in a hotel meeting room.
- Meal consumed in a fancy restaurant while on overnight business travel.
- Meals are prepared on the premises for the general public at a marketing presentation or event.
- Meal with a prospective customer at a country club following a non-deductible round of golf.
Meals that are only 50% deductible are as follows:
- Employee meals for the convenience of the employer, served by the in-house cafeteria.
- Meals cooked by you in your hotel room kitchen while traveling away from home overnight.
Please note, if the meal is after a sport or entertainment event, get a separate bill to claim a deduction.
To qualify for a deduction:
- The meal should not be lavish or extravagant.
- The business owner or one of the employees should be present at the time of dining.
Entertainment expenses like a meeting at a theater, golf club, nightclub, or sports event are not allowed as deductions. The criteria here is that the location should be appropriate for conducting business activities.
The following are non-deductible expenses:
- Entertainment such as baseball and football games with clients and prospects.
- Golf or theater with your best customer.
- Year-end party for customers classified as entertainment.
On the flip side, the following are fully deductible entertainment expenses:
- Year-end party for employees and spouses.
- Golf outing for employees and spouses.
- Team-building recreational event for all employees.
It is a common practice for businesses to spend on food and entertainment expenses. Now, with the increase in eligibility, track your expenses to avail of the maximum deduction possible.
If you need any help with accounting or taxation, contact our team at FinAccurate.
If you would like to watch the video of this article, click on the link below:- What Meal And Entertainment Expenses Can Businesses Confidently Claim In 2021-2022?
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