With all the changes COVID-19 has brought upon the world, it is easy for some to slip your mind. We wanted to remind you of the tax change to meals deductibility because of COVID. Certain meal expenses are now 100% deductible instead of 50% deductible.
The new rules surrounding meals deductibility are in effect for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023. Fiscal year-end businesses whose year may have begun before December 31, 2020 will have to ensure the expenses were incurred after December 31, 2020 to take advantage of this benefit. Otherwise, this will begin for businesses using a 2021 calendar tax year.
According to the updated rules, meals that are now 100% deductible strictly apply to food or beverages provided by a restaurant. The IRS implemented the new rule to incentivize businesses to still make purchases from restaurants struggling due to Covid. The IRS rule defines a restaurant as 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.” That means if you bought food from a restaurant and brought it back to the office for a meeting this will still qualify for 100% deductibility since you made the purchase from a restaurant.
While this may apply to the majority of expenses in your meal’s account balances, it is important to note that the IRS indicates that any place that primarily sells pre-packaged food or beverages not for immediate consumption does not constitute as a restaurant. Businesses will have to watch out for grocery store, convenience store, and Amazon expenses and the like and delineate those expenses in the accounting records.
Note, the remaining meals and entertainment rules that went into effect with the Tax Cuts & Jobs Act of 2017 remain in effect. See below for a refresher on those.
1) Entertainment expenses, such as sporting events and club memberships that were 50% deductible under the old law are not deductible under TCJA.
2) Meals, water, coffee, snacks, etc. at the office for benefit of employees are now eligible for only a 50% deduction, unless brought in from a restaurant as noted above. Under the prior law, these expenses were eligible for the full deduction.
We suggest that your accounting records isolate entertainment, meals (from a restaurant), prepackaged meals and office snacks in separate accounts to identify the proper deductibility of these expenses. Please note that picnics and holiday parties held primarily for the benefit of your employees will continue to be fully deductible. We suggest that this amount be recorded in a separate account from the entertainment, meals, and office snacks accounts.
Keep in mind that meals with clients and others for business purposes still require substantiation (the amount, time and place, business purpose, and business relationship).
Cray Kaiser is here to help if you have further questions about the deductibility of meals and entertainment expenses. Please contact us today at 630-953-4900.