With the President’s signature enacting into the law the $900 billion COVID-19 relief bill, certain business meals will now be 100% deductible. This full deduction applies to the cost of food or beverages provided by a restaurant and paid or incurred in 2021 and 2022.
The only change to the code was this new exception to the 50% rule. All other areas of Sec. 274 remain the same, including substantiation. As a reminder, proper substantiation is essential because it is what allows the deduction in the first place. First, the expense needs to be ordinary and necessary to be deductible. An expense is necessary if it is helpful and appropriate. Second, the meal needs to have a business connection. The taxpayer must prove there is a valid business purpose for the event that occurs before, during, or after the meal. Other stipulations include that the taxpayer must be present when the activity involves business meals and that the meal is only deductible to the extent that it’s not lavish or extravagant under the circumstances.
Before the Consolidate Appropriations Act that was signed on 12/27/2020, we had seen several changes to Sec. 274 for entertainment and certain meal deductions from the Tax Cuts and Jobs Act of 2018. In October 2020, final guidance was issued for those law changes in 2018. That final guidance gave distinction between the 100% deductible meals, and those only 50% deductible.
100% Deductible based on 2020 final regs (pre-Consolidated Appropriations Act)
- Meal expenses primarily for the benefit of all employees (ex: company picnic, holiday parties, etc.)
- Food and beverages provided to the public to general business (ex: open house, grand opening, etc.
50% Deductible based on 2020 final regs (pre-Consolidated Appropriations Act)
- Meals provided to employees for the “convenience of the employer” such as situations with short meal break and/or working late.
- Meals with a business purpose for meetings with for employees, stockholders, etc.
- Meals with a business purpose for meetings with clients, vendors, etc.
- “de minimis food and beverages”
- Travel meals
Now, for the years 2021 and 2022, taxpayers have this new exception to the 50% rule as mentioned above: there is a full deduction for the cost of food or beverages provided by a restaurant.
There is no clarity on whether this applies only to in-restaurant meals or if it would also apply to catered or takeout meals. There is also no clarity on which types of meal activities in the 50% category above will now get the 100% deduction treatment. For example, does this new 100% deduction apply to meals provided to employees for the employer’s convenience? Does this apply to travel meals?
Given the devastating decrease to in-restaurant dining in 2020 and continuing into 2021, as well as various restrictions on restaurant operations across different jurisdictions due to the COVID-19 pandemic, we believe the intent of this change allows for the interpretation that the 100% deduction would apply to in-restaurant meals as well as catered and takeout meals – and then widely apply to the previously only 50% deductible meal categories. Stay tuned for future guidance from the IRS who will hopefully provide clear guidance. In the meantime, create a plan to start tracking these expenses for your business beginning January 1, 2021.