The 2017 Tax Cuts and Jobs Act introduced some significant changes to the way businesses could handle deductions for business meals and entertainment expenses. Although the TCJA guidelines for these expenses haven’t undergone much revision, the IRS has provided further clarification for activities classified as expenditures related to entertainment, amusement, or recreational activities. The term entertainment does not include food or beverages unless the food or beverages are provided at or during an entertainment activity and the costs are not separately stated from the entertainment costs.
UPDATE: The COVID-19 Relief Bill, signed by the President on December 27, 2020, made changes to deductions for business meals in tax years 2021 and 2022. Businesses will be permitted to fully deduct business meals that would normally be 50% deductible. Although this change will not affect your 2020 tax return, the savings will offer a 100% deduction in 2021 and 2022 for food and beverages provided by a restaurant. The objective of the temporary deduction is to stimulate the restaurant industry. In the list of examples below, we’ve indicated those deductions which will change between 2020 and 2021.
The following expenses are not deductible:
- Sporting event tickets
- Transportation to/from a restaurant for client business meals
- Club memberships and club-related expenses
- Meals during entertainment that are not listed separately on the invoice
The following types of expenses are 50% deductible in 2020:
- Meals provided for the convenience of the employer (such as meals for occasional employee overtime) 100% deductible in 2021 and 2022 if the meals are provided by a restaurant
- Water, coffee, and snacks at the office no change in 2021/22
- Meals included in charitable sports packages 100% deductible in 2021/22
The following deductions were unchanged by the TCJA and continue to be allowable:
- Meals in office during meetings of employees, stockholders, agents, or directors (50% deductible) 100% deductible in 2021 and 2022 if the meals are provided by a restaurant
- Meals during business travel (50% deductible) 100% deductible in 2021/22
- Meals at a seminar or conference (50% deductible) 100% deductible in 2021/22
- Meals included as taxable compensation to an employee or independent contractor (100% deductible)
- Meals sold to a client or customer (100% deductible)
- Food offered to the public for free (100% deductible)
- Office holiday party or picnic (100% deductible)
- Client business meals (50% deductible if the taxpayer is present and not lavish or extravagant) 100% deductible in 2021/22
- Team-building events (100% deductible)
We have two bookkeeping recommendations for expenses:
- Separate expenses that are strictly for entertainment purposes—if you don’t already have one, create a new account for these, and designate which are business meals. Travel expenses should be completely separate from entertainment, including meals while traveling. Travel expenses are 100% deductible, except for meals while traveling, which are 50% deductible in 2020 but 100% deductible in 2021/22.
- Create a separate category for employee social meals. These would include things like your holiday party, summer picnic, team building events, staff mentoring, etc. All of these are 100% deductible expenses.
We have put together a comprehensive guide of the top small business tax deductions that will leave you feeling relieved this tax season. In this guide you will find small business tax tips, detailed examples, and strategies to tracking expenses, giving you a better understanding of how to take advantage of these tax savings. Complete the form to receive a free download of: Small Business Tax Deductions – Your guide to understanding the overall impact of business expenses.