Legislation recently passed by Congress for COVID-19 relief contains some tax rule changes that are intended to encourage taxpayer spending. One change that took effect January 1, 2021, temporarily increases the business deduction for meals from 50% to 100% until the end of 2022. The deduction increase could provide business owners the incentive to enjoy a not-from-home meal while conducting business activities.
As usual, the temporary rules are not simple. The IRS guidance recently announced the details and definitions needed by taxpayers to follow the rules while also doubling their business meal deductions:
- The temporary rules apply to any expense paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.
- The term “restaurant” means a retail business that “prepares and sells food or beverages for immediate consumption.” The food or beverages can be consumed on the restaurant’s premises, carried out, or delivered. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, like a grocery store or a vending machine.
- An employer may not treat an on-site eating facility as a restaurant under the temporary rules, either employer-operated or operated by a third party.
Those temporary rules are in addition to all the other rules that aren’t changing for 2021 and 2022, including:
- Business owners also need to be present for the meal and be engaged in conducting business activities. Alternatively, the business owner must be represented by an individual who is connected to the business, such as an employee or contractor.
- Meals cannot be lavish or extravagant under the circumstances.
- As always, a documented record must be kept of the date, amount, business purpose and attendees at the meal.
Not simple at all. But it could be worth your time to learn about the temporary rules for deducting business meal expenses. It could double your business meal deduction! Need more details? The IRS has it for you here – https://www.irs.gov/pub/irs-drop/n-21-25.pdf.