Generally, travel and meal expenses are deductible if they are ordinary, necessary, and reasonable expenses associated with a business. However, for tax purposes, some meals and entertainment expenses may be limited.
The Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, includes several new relief provisions that may benefit your business.
The COVID-19 relief bill has a temporary provision that allows a 100% deduction for any meal expenses purchased from a restaurant after December 31, 2020 through December 31, 2022. The inclusion of this provision is meant to help businesses support the restaurant industry.
For example, if on January 1, 2021, you took a client out for a meal, you can now deduct 100% of the cost (instead of 50% under old law) for tax purposes.
It is important to note that, other than lifting the 50% limit for restaurant meals, the legislation does not change the rules for deducting business meals. All other existing requirements continue to apply. Thus, to be deductible:
• The expense must be ordinary and necessary.
• The food and beverages cannot be lavish and extravagant under the circumstances.
• You or one of your business employees must be present when the food or beverages are served.
• Must be with a prospective customer, client, supplier, employee, agent, partners, or professional adviser with whom you could reasonably expect to engage or deal in your business.
Although this new bill will not affect your 2020 tax return, the savings will offer a 100% deduction in 2021 and 2022 for food and beverages provided by a restaurant.
Here is a summary table of the most popular deductions and how they have changed:
*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 separately on the invoice, or receipt. Otherwise, food or beverages, at an entertainment activity, will be nondeductible for tax purposes.
To account for these changes, we recommend you create a separate account for:
• Entertainment account – just for entertainment purposes.
• Travel expenses should be a separate account from entertainment and meals. Travel expenses are 100% deductible, except meals while traveling.
• Any meals purchased for takeout or delivery from a restaurant should be tracked in a separate account.
• Meals accounts should be broken into categories to aid your accountant in maximizing your deductions. For example, Client Meals, Employee Meals, Office Snacks, etc.
Geffen Mesher professionals are ready to help answer any questions that may arise when you are reorganizing your expenses to maximize your benefit under the CAA.
Questions? Contact: Tania Gitch, Shareholder and Tax Department Chair, CPA