A new year means new rules on determining the tax deductibility of meals for your business. Generally, business meals are 50% deductible for tax purposes unless the meals fall under an exception. The Consolidated Appropriations Act, 2021 made changes to the rules regarding the deductibility of business meals provided by restaurants.
Meals provided by a restaurant after December 31, 2020, and before January 1, 2023, are 100% deductible for federal tax purposes. While the meal must be provided by a restaurant, the meal is not required to be consumed on the restaurant premises, thus take-out and delivery orders would qualify for this exception to the general rule. The meal must also continue to meet the other existing requirements of business meals, including:
- The expense is ordinary and necessary.
- The food and beverages are not lavish or extravagant under the circumstances.
- The taxpayer or an employee must be present when the food or beverages are served.
- The food must be provided to the taxpayer or a business associate, such as a customer, supplier, employee, or professional advisor, with whom the entity reasonably expects to engage or interact with in its business.
- Food and beverages purchased at an entertainment activity must be purchased separately or separately stated on the invoice.
A best accounting practice is to sort the business meals and entertainment expenses into separate general ledger accounts based on tax deductibility. The new legislation’s treatment of meals provided by a restaurant will require an adjustment in employee expense reports and coding of expenses to the general ledger account to ensure the expense is correctly coded to a 100% tax deductible account.