Deduct 100 Percent of Your Business Meals under New Rules

As a subscriber, you know that we try to find multiple ways for you to legally deduct 100 percent of your business meal expenses versus the typical 50 percent.

Now, thanks to a new law enacted December 27, 2020, new IRS regulations, and a new IRS notice (yep, all three are new), you have fresh opportunities for writing off 100 percent of your business meals.

For 2021 and 2022, you can deduct 100 percent of your business meals by paying attention to a few new, easy rules.

We’ll explain how this new, favorable rule works. It’s easy — that’s good. Of course, there a few potholes to beware of. All will be revealed when you read this article.

New 100 Percent Meal Deduction

Since 1986, lawmakers have limited business meal deductions: first to 80 percent, and then to 50 percent (unless an exception applies).

But on December 27, 2020, in an effort to help the restaurant industry due to the COVID-19 pandemic, lawmakers enacted a new, temporary 100 percent business meal deduction for calendar years 2021 and 2022.

To qualify for the 100 percent deduction, you need a restaurant to provide you with the food or beverages.

Planning point. The law requires only that the restaurant provide the food and beverages. You don’t have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal that’s delivered by Uber Eats or Grubhub.

In other words, you can dine in the restaurant, order takeout, or use delivery.

Key point. You need a qualifying business meal for the 100 percent deduction.

Business Meal Rules

Rule 1. Your deductible business meals must be tax code Section 162 ordinary and necessary business expenses, and they must not be subject to disallowance under tax code Section 274. (Not to worry — we’ll make this easy).

Rule 2. Per IRS regulations, you may not deduct lavish or extravagant business meals. You are not likely to have this problem, regardless of what you spend. Here’s why:

  • In its publication on entertainment expenses, the IRS states: “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 Bloomberg BNA Tax Management Portfolio in entertainment deduction states: “No reported case to date has ever upheld a disallowance of a taxpayer’s travel, entertainment, or meal expenses on the grounds that they were ‘lavish and extravagant under the circumstances.’

Rule 3. You must be present at the business meal, and you must provide the business meal to a person with whom you could reasonably expect to engage or deal with in the active conduct of your business, such as a customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.

What’s an IRS-Defined Restaurant?

Remember, to qualify for the 100 percent deduction, you need a restaurant. The IRS recently provided definitions and examples of what is and is not a restaurant.

A restaurant is “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.”

A restaurant is NOT “a business that primarily sells pre-packaged food or beverages, not for immediate consumption,” including, but not limited to, the following:

  • Grocery stores
  • Specialty food stores
  • Beer, wine, or liquor stores
  • Drug stores
  • Convenience stores
  • Newsstands
  • Vending machines or kiosks

In general, the 50 percent limitation applies to business meals from the sources listed above.

Examples

Assume each of the examples below occurs during the tax year 2021.

Example 1. You are out of town on business and stay at a hotel where you have a kitchen in your room. You go to the grocery store and buy food and beverages to consume while in the hotel room.

You can deduct 50 percent of the expense because the grocery store primarily sells pre-packaged food or beverages, not for immediate consumption.

Example 2. You are out of town on business and stay at a hotel for five days. You go to the Starbucks across the street from the hotel each day to get breakfast and your morning coffee prior to your work meetings.

You can deduct 100 percent of the expense because Starbucks prepares and sells food or beverages to retail customers for immediate consumption.

Example 3. You meet for lunch with a customer in your office. You order food from a local Italian restaurant and have it delivered to your office.

You can deduct 100 percent of the expense because the restaurant prepares and sells food or beverages to retail customers for immediate consumption.

You can include the delivery fees and tip as a food and beverage expense.

Example 4. You meet with a prospective client at a local restaurant to discuss working together on a business deal. You order food and beverages for both yourself and the prospect.

You can deduct 100 percent of the expense because the restaurant prepares and sells food or beverages to retail customers for immediate consumption.

Example 5. You are driving from your home to an out-of-town business destination for a two-day, overnight business seminar. On your way, you stop at a small-town gas station convenience store and buy a hot dog and coffee for lunch.

You can deduct 50 percent of the expense because the grocery store primarily sells pre-packaged food or beverages, not for immediate consumption.

Example 6. You drive six hours away from home for a two-day, overnight business trip. On your way, you stop at McDonald’s and buy a hamburger and coffee for lunch.

You can deduct 100 percent of the expense because McDonald’s prepares and sells food or beverages to retail customers for immediate consumption.

Example 7. You take two clients to a baseball game. You buy food and drinks from a hot dog stand inside the stadium, for yourself and your clients.

You can deduct 100 percent of the expense because the stand prepares and sells food or beverages to retail customers for immediate consumption.

This expense isn’t a non-deductible entertainment expense because you purchased the food and drinks separately from the baseball game tickets.

Example 8. You take two clients to a baseball game. You buy a suite that provides food and beverage service, including cooked foods and prepared alcoholic beverages. The invoice separately states the food and beverages expense.

You can deduct 100 percent of the expense because the suite prepares and sells food or beverages to retail customers for immediate consumption.

This expense isn’t a non-deductible entertainment expense because you purchased the food and drinks separately from the baseball game tickets.

Example 9. You provide a break room for your employees, with coffee, bagels, and assorted snacks that you buy in bulk from a wholesale retailer such as Costco.

You can deduct 50 percent of the expense because the store primarily sells pre-packaged food or beverages, not for immediate consumption.

Example 10. You provide a break room for your employees, with coffee, bagels, and assorted snacks that you have delivered daily from a local restaurant using a food delivery app.

You can deduct 100 percent of the expense because the restaurant prepares and sells food or beverages to retail customers for immediate consumption.

You can include the delivery fees and to as a food and beverage expense.

Per Diem Problem

If you simply deduct a per diem meal expense for out-of-town business travel or pay your employees a per diem, you can deduct only 50 percent of that expense.

If you deduct your actual expenses instead of the per diem, you can shift your expenses to being 100 percent deductible for the next two years.

Example 11. You are out of town overnight on business. You spend $10 for breakfast, $20 for lunch, $30 for dinner, and $5 for coffee during the day. You buy these items from locations that qualify as restaurants.

  • If you use the per diem method, you can deduct only 50 percent of the $56 per diem, or $28.
  • If you deduct your actual expenses, you can deduct 100 percent of the $65 you spent on food and beverages.

And because each of your meal expenses was under $75, you don’t face a tax record-keeping difference because you don’t need to keep receipts for business meals that are less than $75. (However, you do need to make a record of them.)

Takeaways

For 2021 and 2022, Congress gave businesses large and small an incentive to buy business-meal food and beverages from restaurants, because such purchases are 100 percent deductible.

Be sure every business meal you buy is from an IRS-approved restaurant location, which is a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether you consume the food or beverages on the business’s premises.

This new rule is another reason to move away from deducting a per diem for your business travel meals. You’ll almost always get larger tax deductions by deducting 100 percent of your actual restaurant expenses versus 50 percent of the per diem amount.

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