The new meals deductions are confusing, so let’s go through this course by course (so to speak).
First, let’s look at what business meals are deductible in 2020. We had tax law from Congress, which has been modified by the IRS in final regulations just recently. Unfortunately, that’s the way it works with tax law. We think we know what is going on and then the IRS or some other agency changes it.
This is the final for where we are right now for meals deductions for your 2020 tax return.
100 percent deductible meals: (2020)
- Meal expenses for a social event such as company picnic or holiday party.
- Food made available to the public for free, usually as part of a promotional campaign.
- When the meal’s expense is included as compensation to the employee and included on the W-2.
- If a professional firm bills actual meal expenses separately when invoicing the client and is reimbursed by the client, the actual meal expenses for that engagement are fully deductible. However, if the meal’s expense is included in the invoice, but is not separately stated at actual cost, then those meal expenses are only 50 percent deductible.
- Meals and food that are part of a charity sporting event are fully deductible. To qualify, the event must be organized for the primary purpose of benefiting a 501(c)(3) organization (nonprofit), 100 percent of net proceeds are contributed to the organization, and volunteers perform substantially all the work in carrying out the event.
- If the business sells food, employers can still deduct 100% of meals given to employees between, before, or after shifts.
Limited to 50%, per new final IRS regulations (formerly 100% deductible): (2020)
- Office Snacks, including coffee, soft drinks, bottled water, donuts, and similar snacks or beverages provided to employees on the business premises.
- Any meals provided on the employer’s premises for the convenience of the employer. For example, if you are providing meals to employees in order to keep them working late, in your break room, working weekends, or being on call, it is for your convenience to have them at work and the meal is a means of enticement.
50 percent deductible meals: (2020)
- Meal expenses for a business meeting, office meetings and partner meetings of employees, stockholders, agents, and/or directors.
- Any meals during business travel. If part of the travel is personal, then the meals associated with that will not be considered business.
- Meals at a convention, seminar, or similar type of business.
- Meals with people related to the business, such as clients, customers, and vendors, provided that there is a business purpose or some benefit to the business will result.
- Meal expenses by an employee during a business trip, and reimbursed to that employee, are still only deductible at 50 percent, even though the employee was reimbursed 100 percent for the cost of the meals.
- Reimbursements using per diem rates are always only 50 percent deductible.
Meals Deduction for 2021
The new Coronavirus tax bill has 100% deduction for business meals and beverages in a restaurant that are incurred after Dec. 31, 2020, and before Jan. 1, 2023.
Proposed Regulations issued earlier this year permit a taxpayer to deduct meal expenses if
(1) the expense is not lavish or extravagant under the circumstances;
(2) the taxpayer or the taxpayer’s employee is present at the meal; and
(3) the meal is provided to a business associate.
The proposed regulations define a “business associate” as a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business, such as the taxpayer’s customer, client, supplier, employee, agent, partner or professional adviser, whether established or prospective.
There are likely more regulations coming for 2021 in this area since there are so many unanswered questions. Does take out from a restaurant count? How about a chef working a private dinner party, who also happens to own a restaurant? Does a fast food joint count as a restaurant?
All we can do now is guess.
Make sure you stay enrolled in our free tax update service. You’ll get important emails with tax updates. Sign up now while the service is still free.