The “three martini lunch” has reappeared, as have other recent changes to the taxability of business entertainment and food and beverage expenses. On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the “CAA Act”), authorizing a 100% deduction for certain business meal expenses for the next two years. Prior to the CAA Act’s implementation, the Internal Revenue Service (“IRS”) issued final regulations (“Regulations”) whereby entertainment expenses were not deductible; but depending on the nature of the expense involved, meal expenses could be partially or fully deductible.
Businesses have long struggled with deduction allowances for meal and entertainment expenses. Prior to 2018, taxpayers were generally allowed to deduct 50% of meals and entertainment expenditures that otherwise met IRS guidelines. Beginning January 1, 2018, the Tax Cuts and Jobs Act (“TCJA”) eliminated the deduction for expenditures considered entertainment, amusement, or recreation. The law remained unclear regarding food and beverage expenses when combined with entertainment activities.
Under the prior Regulations, no deduction was allowed for expenditures on any activity generally considered to be entertainment, amusement, and recreation, or with respect to a facility used in connection with an entertainment activity. Activities falling within these guidelines included entertainment at bars, theaters, social, athletic or sporting clubs, hunting, fishing, and vacation trips. For example, tickets purchased to a professional sports event, for the purpose of discussing business, are considered entertainment and are not deductible under the Regulations. Food or beverages provided at or during an entertainment activity were generally treated as part of the entertainment activity, and therefore nondeductible. However, food or beverages purchased separately from the entertainment, or those whose cost is separately stated from the cost of entertainment, were deductible. For example, if a taxpayer invites a business associate to a college sports event and purchases food and beverages separately for them both at an alumni booth, the cost of the tickets to the event are nondeductible as entertainment expenses, but 50% of the cost of the meals and beverages were deductible by the employer.
Food and Beverage Expenses after Passage of the CAA Act
Prior to passage of the Act, businesses generally could deduct 50% of the amount incurred for food and beverages expenditures. Similarly, meal and beverage expenses incurred while traveling away from home on business were subject to the 50% deduction limitation. Under the Act, companies may now deduct 100% of business meals if the meals are provided by restaurants and paid or incurred prior to January 1, 2023. It is unclear whether the CAA Act’s new deduction only applies to “in-restaurant dining” or if the allowance will be expanded to include catered events, delivery, or food prepared for takeout.
The CAA Act also provides for 100% deduction of the food and beverage expenses associated with employee shift meals. To qualify, shift meals must be consumed at the restaurant and the food and beverages must have been purchased for the purpose of preparing and providing meals to paying customers. Similarly, food or beverages paid or incurred by a taxpayer for recreational, social, or similar activity, primarily for the benefit of the employer’s employees, is 100% deductible in most circumstances. For example, food and beverage expenses are fully deductible if provided by an employer at a holiday party, picnics, and summer outings, provided they do not discriminate in favor of highly compensated employees. The Act’s deductions also allow an employer to deduct 50% of break room snacks made available to all employees not incurred for recreational, social, or similar activity. Costs incurred on food and beverages available to the general public are not subject to a 50% deduction limitation. With certain limitations, food and beverages provided by a company to employees at a company cafeteria may also be fully deductible. If the employer can reasonably determine the food and beverages primarily will be consumed by the general public, the cost is fully deductible under IRS guidelines.
Employers should ensure accounting policies and employee policies, including employee handbooks as necessary, are updated to reflect these changes. Clear policies will be useful should your company be audited. Please contact Rosenblatt Law Firm for more information.