As part of the Taxpayer Certainty and Disaster Relief Act of 2020, the Treasury Department and the Internal Revenue Service enacted a temporary exception to the 50% limit on what businesses may deduct for food or beverages related to conducting business for federal purposes. The deduction for California business meals remains at 50%. This nine-page PDF Notice 2018-76 provides guidance. And while it is itself a shortened version of the Tax Code, we will try to simplify it further (although double-checking with your CPA is still a good idea). Here’s what you need to know.
To be able to take 100% of the meal deduction for federal tax purposes:
- The food is provided by a restaurant, defined in the code as “a business that prepares and sells food or beverages to retail customers for immediate consumption.” So, a to-go order from a restaurant is acceptable. However, food from grocery stores, liquor stores, and the like are not included.
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer or their employee is present at the meal.
Entertainment is not deductible, but the food is.
So, taking a client out for a meal is deductible, but taking them to a baseball game is not. What happens if you take them to a baseball game AND they have a hotdog? You can deduct 100% of that Dodger Dog (and the beer). But not the ticket to the game.
What do you have to do to make it a business meal?
- You have to be with a client or prospective client or someone who can refer business to you.
- You can write off a business discussion over a meal at a restaurant with a coworker, but talking at a golf course to play 9 holes doesn’t count; however having lunch at the golf course club house to discuss business does qualify.
- You can write off 100% of a meal with people in networking groups, at conferences in your field, etc.
What’s not included as a business meal?
- You cannot write off groceries.
- You wouldn’t write off a coffee latte from the machine at work if you’re at your desk, and
- You cannot write off any meal you have by yourself (unless you’re traveling, and ask your CPA about rules for that).
THE BOTTOM LINE
The idea behind the temporary change is to help restaurants devasted by the pandemic and help business people reinvigorate their business connections at the same time. Don’t wait any longer If you have been hesitant to take out your clients and prospects due to cost. Now is a great time to get back out there and patronize your local restaurant. It’s a win-win!
HOT TIPS OF THE DAY
- If you haven’t completed your taxes for 2021 (yes, it’s getting down to the wire), you can go back and deduct 100% of any business meals starting from January 1, 2021, if they meet the criteria above. Every little bit helps.
- Check with your accountant regarding meals while traveling.
- Generally, ask for a “translation” of the IRS Code. There’s a reason they call it a code: It’s written in “code,” and CPAs are experts at interpreting it!
- Keep your receipts (a credit card record will do) and make a note of what you talked about in your online calendar or in an email following the meal.
- Deductible beverages include alcohol!