The TCJA repealed the “directly related” and “business discussion” exceptions to the general prohibition on deducting entertainment expenses in § 274. It was unclear whether business meals involving a client or potential client fell into the entertainment category and thus were swept into the disallowance. The 50 percent deductibility limit under Section 274 “will continue to apply to the amount of any expense paid or incurred for food or beverages acquired from such a business, unless other exceptions apply,” King explained.

• Generally, Internal Revenue Code Section 274 provides a limitation of 50% deductibility on all food and beverage expenses.
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• The rules for substantiating business food and beverage expenses have to be carefully followed to ensure the deduction is allowed.
• Code Sec. 274 generally provides that the amount allowable as a deduction for any expense for food or beverages cannot exceed 50 percent of the amount of the expense that otherwise would be allowable.
• For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
• Also excluded are employer-operated eating facilities treated as a de minimis fringe (under Code § 132), even if the facility is operated by a third party under contract with the employer.

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IRS Clarifies Temporary 100% Deduction for Restaurant-Purchased Meals

To qualify for the 100% deduction, employers should maintain their receipts and support that the expenses are related to a restaurant. We recommend tracking the meals that qualify as you go throughout the year or recording them to a 100% deductible meals account so that the information is easy to gather. Your tax preparer will specifically inquire about meals that are 100% deductible, 50% deductible, and non-deductible at the end of the year.

The proposed regulation also provides a “safe harbor” for routine maintenance. It indicates that recurring activities that are expected to be performed as a result of the use of property to keep the property in its ordinarily operating condition aren’t capital improvements. The activity is considered routine if, at the time the property was placed in service, the taxpayer reasonably expected to perform the activity more than once during the property’s life. The Consolidated Appropriations Act, which was passed at the end of 2020, temporarily amended the business meal deduction and expanded it. For 2021 and 2022, the business meal deduction is 100 percent, but with a few caveats.

Meals continue to be deductible under new IRS guidance

The amount may qualify for a deduction, if you meet certain other requirements. Employee parties – holiday or otherwise – picnics, outings, and team-building events will all qualify for a 100 percent deduction. To qualify for the 100 percent entertainment deduction, the party must be primarily for employees – not owners or highly compensated individuals – and appropriate documentation must be maintained. The 2018 notice provided that taxpayers couldn’t circumvent this entertainment disallowance rule by inflating the amount charged for food and beverages. The proposed regs tackle this issue by requiring that the amount charged for food or beverages reflect 1) the venue’s usual selling cost for those items if purchased separately from the entertainment, or 2) the reasonable value of the items.

The Irs Guidance Clarifies Business Revenue Service on November 16th issued guidance on the temporary 100% deduction for food or beverage purchases from restaurants. Sec. 274, which was not amended by the TCJA, does not allow a deduction for the expense of any food or beverages unless the expense is not lavish or extravagant under the circumstances, and the taxpayer is present when the food or beverages are furnished. Sec. 274, which was amended by the TCJA, generally provides that the amount allowable as a deduction for any expense for food or beverages cannot exceed 50% of the amount of the expense that otherwise would be allowable.

The IRS provides guidance on meal and entertainment deductions

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• Entertainment facilities offering package deals including food and beverages will doubtless be happy to separately list their cost so you can get a tax deduction.
• The notice specifically states that purchases from grocery stores, specialty food stores, liquor stores, drug stores, convenience stores, newsstands, vending machines or kiosks would not qualify for a 100% deduction as the purchase would not be considered for immediate consumption.
• Many tax experts feared that, for these purposes, “entertainment” also included paying for food or beverages at restaurants or other places.
• In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.
• You can deduct the cost of food and beverage expenses, including any delivery fees, tips, and sales tax.

An https://quick-bookkeeping.net/-operated eating facility treated as an IRC Section 132 de minimis fringe even if operated by a third party under contract with the employer. For details on these and other tax benefits, see Publication 535, Business Expenses. Details on another major expense for most businesses, depreciation of buildings, equipment and other assets, can be found in Publication 946, How to Depreciate Property. Yet another worthwhile resource for any small business is the agency’s Tax Guide for Small Business, Publication 334. If you have questions on how this change in deduction affects your tracking or would like to discuss best practices for your tax strategy, BMF Advisors are available to discuss your situation.

This is an easy way for businesses to save money on taxes while supporting the struggling restaurant industry, and a strong motivator to hold more employee parties and gatherings as 2021 winds down and into 2022. Hopefully, 2022 will be the year that client and employee business meetings in a restaurant will become more popular again and replace some of the virtual business meetings we have become accustomed to during the past two years. While many companies are still holding off on big gatherings, at least a quarter of employers are planning or have already had a holiday party.

• Most restaurant meals expenses are only 100% deductible from Jan. 1, 2021 through Dec. 31, 2022, so it’s important to take advantage of these changes while the 100% deduction is available.
• Pre-TCJA Code Sec. 274 generally limited the deduction of food and beverage (i.e., meal) expenses and entertainment expenses to 50 percent of the amount that otherwise would have been allowable.
• The notice “provides important details that should be applied when determining whether an expense qualifies for the larger deduction amount,” wrote Alexis Nash, a partner at accounting and tax advisory firm Wilson Lewis in Atlanta.
• The temporarily enhanced deduction doesn’t apply to entertainment, which remains a disallowed deduction.