How much can you write off for meals and entertainment

If you’re a sole proprietor, you can deduct ordinary and necessary business meals and entertainment expenses. However, these expenses must be directly related to or associated with your business. If you’re an employee, you can deduct these only to the extent your employer doesn’t reimburse you.

Entertainment includes an activity that provides:

• Amusement
• Entertainment
• Recreation, including meals you bought your customer or client

To meet the directly-related requirement, you must show all of these:

• The main purpose of the entertainment was the conduct of business.
• You engaged in business during the entertainment period.
• You expected to get income or some other business benefit.

Your expense might not meet the directly-related requirement. If so, you might be able to deduct a meal or entertainment expense if you can meet the associated test. This test requires both of these to be true:

• The expense is associated with the active conduct of a trade or business. So, the expense must have a clear business purpose, like:
  • Getting new business
  • Encouraging the continuation of an existing business relationship
• You discuss a substantial amount of business before, during, or after the meal or entertainment.

The expenses can’t be lavish or extravagant. Your deduction is usually limited to 50% of the expenses. You can fully deduct the cost of business gifts up to a maximum of $25 per client per year if they’re:

• Ordinary and necessary to your business
• Given to current or prospective clients

Note for the 2021 and 2022 tax years: this deduction covers 100% of business meals that are dine-in, catered or take-out; and a 50% limit is in place for food and beverage not from restaurants.

Tickets to shows or sporting events you give to clients to promote business are deductible. If you accompany your client to the event, you can deduct the cost of the tickets as an entertainment expense. If you don’t accompany your client, you can deduct the cost as an entertainment expense or as a gift. Choose whichever gives you the larger deduction.

You can also deduct the cost of your meal and your client’s meal if you meet all of the requirements. You usually can’t deduct the cost of entertainment for your spouse or for your customer’s spouse. However, you can deduct these costs if you can show you had a clear business purpose for providing the entertainment. A personal or social purpose doesn’t qualify.

You can’t deduct more than the face value of an entertainment ticket, even if you paid a higher price.

Dues to business or professional organizations that promote your business are also deductible. However, you can’t deduct expenses for club dues, like those you pay to:

• Country clubs
• Social clubs
• Athletic clubs
• Airline clubs

Recordkeeping
Your meal and entertainment expense records should include:

• Documentary evidence, like:
  • Receipts
  • Canceled checks
  • Bills
• Cost of each meal or entertainment expense. You can add together incidental expenses (Ex: cab fares and phone calls) and record the total on a daily basis.
• Date meal or entertainment took place
• Name, location, and type of meal or entertainment — like dinner or theater
• Reason for meal or entertainment, which includes:
  • Business benefit you got from entertaining your client
  • Brief summary of business discussion that took place
• Name(s), and occupations(s) of the people you entertained or dined with

To learn more, see Publication 463: Travel, Entertainment, Gift and Car Expenses at www.irs.gov.

The federal income tax treatment of business-related meal and entertainment expenses has been a moving target. If you’re confused about what rules currently apply, I don’t blame you. This column aims to eliminate confusion. That’s an optimistic goal, but here goes.

A 2020 COVID-19 relief bill made taxpayer-friendly changes

A taxpayer-friendly change in the CAA — the COVID-19 relief bill that became law late last year — allows you to write off 100% of the cost of business-related food and beverages provided by restaurants in 2021 and 2022. The “provided by” language apparently means the temporary 100% deduction rule applies equally to sit-down meals and take out. Before this change, deductions for business meals at restaurants were limited to only 50% of cost.

However, there are some unanswered questions: Do bars that serve food count as restaurants? Presumably they do. What about airport lounges? What about food trucks? Nobody knows. We await IRS guidance.

For 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses. Before the TCJA, you could deduct 50% of the cost of most business entertainment. But after the TCJA change, you can no longer deduct any part of the cost of taking clients out for a round of golf, to the ballgame, or for a ride on the Ferris wheel. Rats.

For too long, it was unclear what the impact of the TCJA’S general disallowance of write-offs for entertainment expenses would be on the deductibility of business-related meals. In 2020, the IRS finally issued eagerly-awaited regulations. They were written before the CAA change that now allows 100% deductions for business-related restaurant meals in 2021-2022. So, the regulations will need to be updated. Until then, they still provide the useful guidance summarized in the rest of this column.

Food and beverages mean all food and beverage items, regardless of whether they are characterized as meals, snacks, or whatever. In turn, food and beverage costs mean the full cost of such items — including any sales tax, delivery fees, and tips.

For purposes of the general disallowance of deductions for entertainment expenses, the term entertainment does not include food and beverages unless: (1) the food and beverages are provided in conjunction with an entertainment activity (for example, hotdogs and beers at a basketball game) and (2) the food and beverages costs are not separately stated.

So, to be deductible, food and beverages consumed in conjunction with an entertainment activity must: (1) be purchased separately from the entertainment or (2) be separately stated on a bill, invoice, or receipt that reflects the usual selling price for the food and beverages if they were purchased separately from the entertainment or the approximate reasonable value of the food and beverages if they were not purchased separately. Fair enough. Insist on detailed receipts from entertainment venues.

According to the IRS regulations, you can still generally deduct 50% of the cost of business-related meals, as was the case before the TCJA. As stated earlier, however, you can deduct 100% of the cost of business meals provided by restaurants in 2021-2022.

All that said, no deduction is allowed for business meals unless:

1. The expense is not lavish or extravagant under the circumstances (nobody knows what that means), and
2. The taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverages, and
3. The food and beverages are provided to the taxpayer or a business associate.

Business associate means a person with whom you reasonably expect to deal with in the conduct of your business — such as an established or prospective customer, client, supplier, employee, agent, partner, or professional adviser.

Key point: The regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself (say because you get stuck somewhere working late at night). You can deduct 100% of the cost if the business-related meal is provided to you by a restaurant in 2021-2022.

Under the IRS regulations, the general rule is that 50% of the cost of meals (food and beverages) while traveling on business can still be deducted, as was the case before the TCJA. Or 100% for restaurant-provided meals in 2021-2022. The longstanding rules for substantiating meal expenses still apply. Keep receipts.

The regulations also reiterate the longstanding rule that no deductions are allowed for meal expenses incurred for spouses, dependents, or other individuals who accompany the taxpayer on business travel (or accompany an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual.

For example, meal expenses for your spouse are deductible if he or she works in your unincorporated business and accompanies you on a business trip for legitimate business reasons. The temporary 100% deduction allowance applies to legitimate business-travel-related meals provided to your spouse by restaurants in 2021-2022.

Before the TCJA, the following favorable tax-law exceptions allowed 100% deductibility for eligible meal and entertainment expenses.

A little-known fact is that these exceptions are still available in the tax world that we currently live in. These long-standing but not necessarily well-known exceptions predate the CAA’s temporary 100% deductibility allowance for business-related meals provided by restaurants in 2021-2022.

• Your business can deduct 100% of meal and entertainment expenses that are reported as taxable compensation to recipient employees. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
• Your business can deduct 100% of food, beverage, and entertainment expenses incurred for recreational, social, or similar activities that are incurred primarily for the benefit of employees other than certain highly compensated employees (for example, food and beverages and entertainment at company picnics or company holiday parties that can be attended by all). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
• Your business can deduct 100% of the cost of food, beverages, and entertainment that is made available to the general public (for example, free snacks at a car dealership or free food and music provided at a promotional event open to the public). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.
• Your business can deduct 100% of the cost of food, beverages, and entertainment sold to customers for full value, including the cost of related facilities. IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses. The regulations also confirm that a restaurant or catering business can still deduct 100% of the cost of food and beverage items that are purchased in connection with preparing and providing meals to paying customers and that are consumed at the worksite by employees who work in the restaurant or catering business.
• Your business can deduct 100% of the cost of meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, when a potential customer wins a dinner cruise for 10 valued at $750 at a sales presentation and is issued a Form 1099). IRS regulations confirm that this exception is still available, and it still covers applicable entertainment expenses.

There you have it: several ways your business can deduct 100% of meal costs and even 100% of eligible entertainment expenses. Party on.

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