When Are Business Meals Tax Deductible?

If you’re heading to the restaurant for a business meal, it’s good to know the rules that apply to get a tax deduction.

In recent years, the business meal tax rules have been impacted by both the Tax Cuts and Jobs Act and the Consolidated Appropriations Act.

What Is Considered a Business Meal?

Definition: Food and beverage expenses associated with operating a taxpayer’s trade or business.

Historically, business meals have been deductible, subject to a 50% limit.

Temporary 100% Deduction for COVID-19 Pandemic

In response the the COVID-19 pandemic, the Consolidated Appropriations Act, 2021, P.L. 116-260, enacted a temporary exception to the limitation for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages provided by a restaurant.

This temporary 100% deduction is designed to help restaurants, many of which have been hard-hit by the COVID-19 pandemic.

The IRS recently released guidance explaining when the temporary 100% deduction for restaurant meals is available and when the 50% limitation on the deduction for food and beverages continues to apply.

Impact of the Tax Cuts and Jobs Act

When the Tax Cuts and Jobs Act (“TCJA,” P.L. 115-97, 12/22/2017) was passed, the rules for client and business associate meals became a little muddy.

The TCJA, beginning Jan. 1, 2018, made expenses for entertainment, amusement or recreation expenses for clients and business associates nondeductible.

The IRS announced it will release regulations to clarify when business meal expenses are 50% deductible or not at all. In the meantime, IRS has issued some guidance for taxpayers on the treatment of business meals.

Business Meals Deductible Expenses

The IRS guidance provides that taxpayers may deduct an otherwise allowable business meal expense if:

1. The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on a trade or business
2. The expense isn’t lavish or extravagant under the circumstances
3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact
5. If food and beverages are provided during or at an entertainment activity, then they’re bought separately from the entertainment, or their cost is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The food and beverage charge can’t be inflated to circumvent the entertainment disallowance rule.
   

Proving that Your Business Meals Qualify

A big part of qualifying for the tax deduction is proving that your meals meet the IRS requirements.

Reasonable estimates are insufficient to stand up to IRS challenge.

You must be able to establish:

• Amount spent
• Time and place
• Business purpose
• Business relationship of the individuals involved

It’s important to set up careful and detailed record-keeping procedures to keep track of each business meal and to justify its business connection.

For expenses of $75 or more, documentary proof (receipts, etc.) is required.