By: Patrick Richardson
The Consolidated Appropriations Act of 2021 created new, but temporary, deduction limits for meal expenses for the 2021 and 2022 tax years. Meals are treated as costs of furthering business development, which, of course, changes the economics of the expense. Let’s take a closer look…
The new rules permit a 100% deduction for meals provided by restaurants. The IRS defines restaurants as, “businesses that prepare and sell food or beverages to retail customers for immediate on or off premises consumption.” The new rules continue the already-established meal deduction of 50% for all other non-restaurant meals, which include pre-packaged food that, in most cases, comes from grocery stores.
The previous regulations regarding meal expenses were created by the Tax Cuts and Jobs Act of 2017 (TCJA). Under the TCJA, all meal deductions were limited to 50%, whether from a restaurant or grocery store. The provisions of the TCJA made it less advantageous to use meals as a vehicle for business development.
The new deduction limits have no effect on the current entertainment expense rules. In the past (before TCJA), meals and entertainment were linked together and each deductible, albeit limited to 50%; however, under the TCJA, deductions for entertainment are not deductible, and that treatment remains unchanged for 2021 and 2022.
Now that we’ve explained the new deduction limits, it is necessary to understand how to take advantage of these changes. First, it is important to separate food and beverage expenses from entertainment expenses in your accounting records. If they are grouped together, the expenses will be non-deductible, because entertainment expenses are not deductible, without exception. To maximize the potential deduction for meal expenses, record keeping of meals should be categorized between meals that fall under the 100% deduction (provided by a restaurant) and meals that are 50% deductible.
See below for the deduction limits:
Creating and executing a plan is a necessary aspect of tax accounting. Utilizing proper accounts and understanding the deduction limits for meal expenses allows you to use Tax As A Business Strategy®. Contact your accountant or tax advisor if you have any questions or need assistance regarding the new meal deduction rules.