The meals and entertainment (M&E) deduction got a massive overhaul when President Trump signed the Tax Cuts and Jobs Act (TCJA) in 2017. Entertainment expenses became nondeductible, and businesses lost a good portion of their meals expense deductions. But the rules have changed in the years since to restore at least some of the M&A deduction. These allowances are only temporary, but they come at a time when businesses are recovering from the economic downturn, and you’ll want to take advantage of them while you can.
Timeline of M&E Deduction Changes
In 2017 and years prior, businesses could deduct half of most meals and entertainment expenses they incurred, with a few exceptions that allowed for a 100% deduction. This changed in 2018.
Tax Cuts and Jobs Act of 2017
Beginning in 2018, the TCJA made virtually all entertainment expenses nondeductible. The law did not amend the meals deduction, but taxpayers found themselves questioning if that is what the TCJA intended.
IRS Notice 2018-76
IRS Notice 2018-76, published in October of 2018, reminded taxpayers that – in general – meals continued to be 50% deductible if all the following were true:
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- The expense was not lavish or extravagant.
- The expense was an ordinary and necessary business cost.
- The taxpayer (or their employee) is present when the meals were furnished.
- The meals were provided to a current or potential customer, client, or other business contact.
- The meal costs were separately stated on the invoice.
But one question remained: taxpayers wondered how they should differentiate between meals and entertainment expenses, especially in situations where meals were provided alongside a recreational activity.
TD 9925
In late 2020, the IRS released final regulations that reiterated that entertainment expenses were almost never deductible. This includes dues or fees paid to social, athletic, or sporting clubs or organizations. But it did provide a caveat; a business could take a 50% deduction for meals served during entertainment activities as long as those costs were separately stated on the invoice.
The regulations listed exceptions to the 50% meals deduction, allowing a full deduction in the following scenarios:
-
- Meals that are treated as compensation or as taxable fringe benefits (nontaxable de minimis fringe benefits are only 50% deductible).
- Food made available to customers, clients, visitors, and other members of the general public (such as waiting room snacks).
- Meals provided to employees during a recreational activity for their benefit (such as food provided at holiday parties where all employees are invited).
Consolidated Appropriations Act, 2021 (CAA)
Not long after the IRS released its final regulations on the TCJA’s amendments, Congress passed yet another law that changed M&E deductions. The Consolidated Appropriations Act (CAA), which was passed in late December of 2020, temporarily reversed some of the TCJA’s restrictions on 100% meals deductions. In general, it allows businesses to take a 100% deduction for meals provided by a restaurant in 2021 and 2022. For purposes of this temporary allowance, a “restaurant” is a business that prepares and sells food or beverages for immediate consumption (including take-out) but does not include businesses that sell prepackaged food or beverages. This means that food purchased from grocery stores, liquor stores, drug stores, newsstands, vending machines, specialty food stores, and convenience stores continue to be subject to the 50% limitation.
The CAA also clarifies that an eating facility located on the premises (like a cafeteria) is not considered a restaurant for the 100% deduction.
What to Deduct in 2021 and 2022
Meals may or may not be a significant line item for you, but it’s important you classify your expenses correctly so you can optimize your deduction. Below is a summary of what expenses are deductible in 2021 and 2022, and how that deduction will change in 2023.
|
|
2021-2022 |
2023+ |
|
Entertainment expenses |
Not deductible |
Not deductible |
|
Business meals provided by a restaurant |
100% deductible |
50% deductible |
|
Restaurant costs incurred while traveling for business |
100% deductible |
50% deductible |
|
Restaurant meals incurred alongside an entertainment activity (like the cost of a hot dog while at a baseball game), as long as the cost is separately stated |
100% deductible |
50% deductible |
|
Meals treated as de minimis fringe benefits (like snacks provided in the break room) |
50% deductible |
50% deductible |
|
Food purchased at holiday parties and company picnics |
100% deductible |
100% deductible |
|
Food made available to the general public (like waiting room snacks) |
100% deductible |
100% deductible |
|
Meals provided for the convenience of the employer (like when food is served during a monthly meeting) |
100% deductible if food is purchased from a restaurant |
50% deductible |
|
Meals included in employees’ gross wages |
100% deductible |
100% deductible |
Unfortunately, the M&E deduction is still on the move. The meals deduction will change again in 2026. Unless another law is passed that changes this provision, the TCJA will disallow expense deductions for the following costs beginning in 2026:
-
- The operation of an eating facility and the food costs associated with that eating facility.
- Meals for the convenience of the employer.
One of the best things you can do to stay on top of these law changes is to try to classify your expenses properly from the beginning. Even if you’re unsure which expenses are deductible, if you group like expenses together, your Meaden & Moore CPAs can determine the correct deduction come tax time. If you have questions about the M&E deduction, please reach out to us today.
This article was featured in Crain's Cleveland Business on June 14, 2021.
