Deducting Business Meals - COVID-19 Relief Update

Deducting Business Meals - COVID-19 Relief Update

Executive Summary

The recently passed Consolidated Appropriations Act 2021 expands the deduction for business meals from 50% to 100% for years 2021 and 2022, if the meal is provided by a restaurant.

What exactly is a business meal?

Fortunately, the IRS recently provided a fairly concise answer to this question in Treasury Decision 9925. T.D. 9925 states that a business meal consists of food and beverage provided to a, “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective”.

It is important to note that business meals are subject to the requirements of Section 162 of the tax code, which requires that an expense be “ordinary and necessary” in the conduct of a trade or business for that expense to be deductible. Therefore, meals that are overly extravagant for the circumstances are not deductible. For example, a once-a-month hamburger with the CPA is fine, but daily filet mignon with the gardener is pushing it.

How much can I deduct?

The Tax Cuts and Jobs Act simplified this answer by making business meals generally 50% deductible. This includes meals with customers, meals for traveling employees, and meals provided to employees for the convenience of the employer. Only meals provided at employer functions such as parties and picnics remain 100% deductible. These rules are effective through 12/31/2020.

The recently passed Consolidated Appropriations Act 2021 provides an exception to the 50% limitation. Taxpayers will be allowed to deduct 100% of business meals if the meal is “provided by a restaurant” between 01/01/2021 and 12/31/2022.

At this time, the use of the phrase “provided by” is thought to mean that a meal does not need to be eaten at a restaurant in order to qualify for a 100% deduction. Meaning that take-out or delivery would qualify. However, that suggests another question; what does Congress mean by “restaurant”? Does a catering company qualify? Hopefully, the IRS will issue definitive guidance on this issue before 2021 tax returns are filed.

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