For decades, taxpayers who are in business have been allowed to partly deduct the cost of meals with clients, customers, employees, and others. However, many feared that this beloved deduction was lost as a result of the Tax Cuts and Jobs Act ("TCJA") that went into effect on January 1, 2018.
The TCJA eliminated all business deductions for "entertainment, amusement, or recreation." (IRC Sec. 274(a)). This includes most things you'd think of as entertainment, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, or vacation trips. Many tax experts feared that, for these purposes, "entertainment" also included paying for food or beverages at restaurants or other places. If so, business-related meals would no longer be tax deductible—a huge change that would adversely affect restaurants and other businesses.
Fortunately for restaurants and business owners who like to eat in them, the tax deduction for business-related meals was not eliminated by the TCJA. The IRS has adopted regulations providing that most business-related food and beverage expenses remain deductible. (IRS Reg. 1.274-12).
Under the regulations, food and beverage costs are deductible as a business expense if:
Although the meal may not be "lavish or extravagant," there is no dollar limit on how much you can spend, nor are you barred from eating at deluxe restaurants. You must use your common sense to determine if a meal is too lavish under the circumstances. In practice, the IRS will rarely second guess you on this, especially if you have good documentation for the expense.
You or an employee needs to be present at the meal to take this deduction. Moreover, the food or beverages must be furnished to a "business associate," which is any person you could reasonably expect to engage or deal with in the active conduct of your business. This includes current or prospective customers, clients, suppliers, employees, agents, partners, or professional advisers.
The IRS does not require that you actually close a deal or get some other specific business benefit to take this deduction.
You can deduct the cost of food and beverage expenses, including any delivery fees, tips, and sales tax.
If you go on a business trip with your family, you may deduct meals for yourself, but not for your spouse or other family members. The only exception is if your spouse or other family member is your employee and needs to be on a business trip to help you.
Special rules apply when food and beverages are provided during an entertainment activity to which you take a business associate. For these purposes, "entertainment" includes any activity generally considered to be entertainment, amusement, or recreation. This includes entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips.
The cost of the entertainment activity itself is not deductible. But food and beverages provided during an entertainment activity are deductible if they are purchased separately from the entertainment or listed separately on the receipt. (IRS Reg. 1.274-11),
Example: You treat a client to a baseball game (which you also attend) and pay for beers and food while at the game. Because you paid for the beer and food separately, you can deduct the cost. You can't deduct the cost of the tickets.
What if the cost of tickets for an entertainment event like a ball game includes the cost of food and beverages? The food and beverages are not deductible unless separately listed on the bill or invoice. 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.
Ordinarily, you may only deduct 50% of the total cost of a business meal. For example, if a meal costs $100, you may deduct $50.
However, Congress has enacted a special rule for 2021 and 2022 only. During these years, you may deduct 100% of the cost of business meals and beverages purchased from restaurants. (IRC 274(n)(2)(D)). This is intended to help restaurants get back on their feet after the economic devastation caused by the COVID-19 pandemic.
Business meals not purchased from restaurants are still subject to the 50% limit.
What is a restaurant? The IRS says it is a business that prepares and sells food or beverages to retail customers for immediate consumption. However, you need not eat the food at the restaurant to get the 100% deduction. You can order restaurant take-out and deduct the full cost.
Restaurants do not include businesses that predominantly sell prepackaged food or beverages for later consumption--for example, grocery stores, liquor stores, drug stores, specialty food stores, and vending machines. Food or beverages purchased from these places is subject to the 50% limitation.
Historically, meal and beverage expenses have been subject to strict substantiation rules. These rules remain in effect for meals purchased while traveling on business. Whenever you incur an expense for business-related meals while traveling, you're supposed to document the following facts:
The IRS does not require that you keep receipts, canceled checks, credit card slips, or any other supporting documents for meal expenses that cost less than $75. However, you must still document the facts listed above.
However, meals and beverages you purchase other than while traveling on business are no longer subject to these strict substantiation rules. Now, they are subject to the same recordkeeping rules as any business deduction. This means you are still supposed to have records of the amount and business purpose. But, if you lack adequate records, you can ask the IRS and/or Tax Court to permit you at least a partial deduction under the Cohan rule. Under this rule, taxpayers who lack all required records are permitted to make an estimate of how much they have spent. The IRS has discretion to allow such taxpayers to deduct all or part of the estimated amount. But, you must provide at least some credible evidence on which to base this estimate, such as receipts, canceled checks, notes in your appointment book, or other records.
You should separately track your total costs for meals and beverages purchased from restaurants that are 100% deductible during 2021-2022, and those for meals from other places like grocery stores and liquor stores that are 50% deductible.