By Denise M. Holmes, CPA, Tax Partner
CAA, 2021 Rule Regarding the Deductibility of Business Meal Expenses
The Consolidated Appropriations Act, 2021 (the CAA, 2021), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic. The CAA, 2021 includes numerous provisions that may benefit your business. We have provided a summary of the rule regarding deductibility of business meal expenses below. Each business situation is unique and you should speak with your tax advisor before making any decisions on these or other tax provisions.
In general, if a company has an arrangement that meets the criteria for an accountable plan, the ordinary and necessary food and beverage expenses of operating your business are deductible. However, the deduction is limited to 50 percent of the otherwise allowable expense.
New Exception for Food or Beverage Expenses in 2021 and 2022
Under current law, businesses may deduct 50 percent of the cost of business-related meals. Typically, businesses may deduct the full cost of ordinary expenses. By that logic, business meals should be fully deductible. Since people must eat irrespective of the tax code, however, some portion of fully deductible business meals would simply subsidize individual consumption. In 1993, Congress limited this deduction to 50 percent.
The new legislation adds an exception to the 50 percent limit for expenses for food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.
The new provision is limited to “food or beverages provided by a restaurant,” consistent with the policy objective behind this provision of assisting the restaurant industry.
The use of the word “by” (rather than “in”) a restaurant makes it clear that the new rule is not limited to meals eaten on the restaurant’s premises. Takeout and delivery meals provided by a restaurant are also fully deductible.
Rules for Deducting Business Meal Expenses
It’s important to note that, other than lifting the 50 percent limit for restaurant meals, the legislation does not change the rules for deducting business meals. All the other existing requirements continue to apply. Thus, to be deductible:
- The expense is ordinary and necessary (IRC Sec. 162(a))
- The food and beverages can’t be lavish or extravagant under the circumstances.
- You or one of your employees must be present when the food or beverages are served.
- The food or beverages must be provided to you or to a “business associate.” This is defined as a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business.
If food or beverages are provided at an entertainment activity, either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice, or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.
We will continue to share our insights on the finalized tax and non-tax provisions in the coming weeks. Questions on these or other tax provisions for your business? Please contact your tax advisor or Keiter representative or Email | Phone: 804.747.0000. We are here to help.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.