The recently passed relief bill, officially called the Consolidated Appropriations Act, 2021, contained a provision designed to give a boost to the restaurant industry: upgrading what had been a 50% meal deduction to 100% for “food or beverages provided by a restaurant, and paid or incurred before January 1, 2023.” There are no provisions right now to extend this raise beyond two years.
This is actually a switch from past tax policies and the way of business highlighted in the TV show “Mad Men,” when executives spent long, leisurely business lunches and deducted them on tax returns as a business expense. First, the Tax Reform Act of 1986 lowered the deduction for business meals and entertainment from 100% to 80%, and it required that participants had to discuss business, which had not previously been necessary.
Also added in 1987 was a provision that banned from the deduction any meals that were “lavish and extravagant.” Guidance on this can be hard to find. The IRS says, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances. Meal expenses won’t be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts.”
The Tax Cuts and Jobs Act of 2017 dispensed with entertainment expenses and placed further restrictions on meals, to a 50% allowance, and mandated that it apply only to activities “directly related to the active conduct of a trade or business or incurred immediately before or after a substantial and bona fide business discussion.” The IRS has interpreted this to mean that the taxpayer or employee must be present.
Not changing at this time is the entertainment provision — those expenses are still generally ineligible. As the IRS says, “If provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food or beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.”
As 2021 begins on a hopeful note, with the COVID-19 vaccine being distributed, businesses can look forward to the eventual resumption of business meals. Be sure to keep in contact with financial professionals to make sure you are paying the IRS what you owe but are not — excuse the pun — leaving anything on the table.