Everyone knows about the term tax deduction, right?
If not, then you are at the right place as we will be explaining this further.
In this article, you will be informed about the meals and entertainment tax deduction and how is it applied differently for meals and entertainment, and what other factors are involved in the process.
A tax deduction is a tax incentive used to lower the taxable income on your taxes. The government offers different tax incentives for taxpayers to take advantage of to reduce their overall tax payment. They offer these deductions to encourage certain spending activities.
The standard deduction is the most common deduction for personal taxes as it is offered to all taxpayers and is most advantageous for those that do not have enough expenses to itemize their taxes.
Tax deductions work differently than tax credits. As stated before, a tax deduction takes a certain amount out of your total taxable income. For example, if your business's taxable income is $200,000, and you have a tax deduction of $20,000, the amount of income that you would be taxed at is actually $180,000 ($200,0000 - $20,000).
Do not get tax deductions confused with tax credits. Tax credits lower your tax liability and can lead to you receiving money from the government. They are more advantageous for lowering your taxes. However, in this article, we are going to go over the meals and entertainment tax deduction available for business owners.
In the meals and entertainment taxes, you will find numerous changes in recent years. The restrictions shifted to a low level. According to experts, in 2018, the tax reforms Congress created led to several significant reductions in meals to almost 50%. The same is the case with business and entertainment expenses.
All of this was done through the law known as TJCA (tax cut and jobs act).
Since the implementation of TJCA (tax cut and jobs act), tax deductions were increased for some meals from 50% to 100%.
In the incentive of the TJCA (tax cut and jobs act), most meal expenses have been reduced to a 50 percent deductible. The administration has clarified how the taxpayer should apply for the incentive. For restaurants, additional guidance for temporary changes was implemented under the act CAA (the consolidated appropriations act) 2021.
The era of Covid 19, with a lockdown of more than a year, fired immense disruption throughout the globe. Additional changes were implemented through the Consolidated Appropriations Act (CAA) to facilitate the environment in such crucial times. For the 2022 & 2023 tax years, a 100% business meal deduction is offered for meals by restaurants. The offer is restricted to the food business only; for now, the entertainment corporation is not included.
If an employer provides free meals to its employees from a restaurant the meal qualifies for a 100% deduction.
IRS (internal revenue service) Guidance
To receive the 100% deduction, the business must fulfill the definition of a restaurant. Businesses like grocery stores, liquor stores, convenience stores, drug stores, specialty food stores, and vending machines cannot be classified as restaurants and therefore are only qualified for a 50% tax deduction.
The definition of a restaurant covers those businesses that prepare and sell food to customers regardless of where the meals are consumed at the eating facility or on the business premises long as it results in immediate consumption. An employee or business owner needs to be present when the food is provided.
Meals held in a business premise operating food facility are considered for the 100% offer. And if the food is taken to the company for a meeting or any other purpose, it would qualify for a 100 percent deduction offer most of the time. Beverage expenses are also covered as long as they are not lavish or extravagant.
The amount of the employee meals that can be deducted is the entire cost of the meal, including sales tax, delivery fees, and tips. However, please note that business travel to a restaurant is not considered part of business meal expenses. Travel expenses are part of a different tax deduction.
Tickets to theatre and cinema were thrown to the offer of 50% before tax reforms. Now, these kinds of entertainment activities combined with charitable events are considered non-deductible.
50% deduction expenses are those incurred from most business entertainment including entertaining business customers at your place of business, a restaurant, and other location, or attending a business convention or reception, business meeting, or business luncheons at country clubs or a football game. So there is some good news that can be shared with you.
There are some entertainment costs that the IRS considers deductible and others will never qualify.
Let’s say you are in Los Angeles and take your client to the stadium. You pay a hefty amount to obtain a seat in the stadium for the event that takes place once a year. Your prime focus is to make your client comfortable and impress them. After the first half, you share details of the business with the client.
Then you buy the drinks for the client from a restaurant in the stadium, and you receive a receipt. The sporting event is not a qualification for the 100% deduction, but the meal that was purchased separately is not considered entertainment and would qualify as a meal for a 100% deduction.
The IRS allows deductibility of meals at business entertainment events as long as the purchases of the meals occur separately from the event and the cost of meals is present on a separate bill or invoice.
Alcohol is considered under 50% deduction only if the mentioned tax code is followed.
For example, for an office party or business meetings, the arrangements of wine should never cross the lines of lavish style. For instance, 50 bottles for regular office meetings might face a problem, but the arrangement will qualify for a deduction if hundreds of people are in attendance. The cost of food would be different and the tax deductible would likely be the full deduction.
In 2022 for the ease of the common man, final regulations were released that explained how to apply for meals and entertainment deduction rules. The tax law clearly states that the meals would qualify for a 100% deduction offer only if the activity takes place separately from the entertainment.
Otherwise, they will be considered unfit for 100%, but still, they will qualify for a 50% offer if the meal is purchased separately or if the price of food is available on the voucher. Also, the 50% incentive is limited to meals that are not very expensive or lavish.
The offer is invalid if you take out your family to a restaurant and express a claim for deduction. Even if you own the business, the offer fails to qualify and will be considered non-deductible unless there is a solid business reason, like going for a business purpose.
Even if you appear at the restaurant just by yourself, the offer will still not hold. The meeting should be with an employee or person associated with your business; then, it will qualify for a deduction.
Other parameters associated with the process, like delivery and tip, are considered allowable expenses. Make sure to keep track of the cost of business meals that you incur for the year and understand the premise of each expense so that you can accurately claim your deductions.
Questions? Learn more about the Internal Revenue Code on this IRS page.