The rules regarding the deductibility of expenses paid by the business for meals and entertainment changed in 2018. More recently there was a temporary change to the regulations to assist restaurants hard hit by the COVID-19 pandemic. Meals purchased from a restaurant, previously falling in the 50% deductible category will be considered 100% deductible for 2021 and 2022. Businesses should still have three categories of meals and entertainment to account for the following:
- Entertaining clients, prospects, etc. even if a business was conducted immediately prior to or after the entertainment
- Events put on for the benefit of customers, prospects, etc.
- Lavish or extravagant meals
50% Deductible (100% deductible if purchased from a restaurant in 2021 and 2022)
- Overnight business travel meals
- Meals provided for the convenience of the employer
- Business meetings of employees, stockholders, agents or directors
- Expenses for attendance at a business meeting or convention, business league, boards of trade
- De minimis fringe benefit employee meals (i.e. coffee, monthly treats for birthdays, etc.) This cost was previously fully deductible, and the 50% deduction will be eliminated after the year 2025.
The costs must be ordinary and necessary business expenses, not lavish or extravagant, and the business owner or employee must be present. The temporary 100% deduction does not apply to items purchased from businesses that sell prepackaged items, such as grocery stores, convenience stores, or specialty food stores.
- Meals and entertainment expenses treated as compensation to the employees
- Meals and entertainment reimbursed to the company
- Office holiday parties, picnics, and summer outings
- Items available to the general public as a means of advertising or promoting goodwill in the community, such as complimentary beverages offered in your lobby.
- Expenses includible in income of persons who are not employees – i.e. prizes or awards.