Conveniently timed with the re-opening of many restaurants and venues post COVID-19 closures, the IRS issued final regulations and guidance on what meals and entertainment can be deducted. These final regulations apply to tax years beginning on or after October 9, 2020. Also, see below for an exception to the rules for restaurants, an industry that was particularly hard-hit by COVID-19 closures.
Entertainment: Final regulations confirmed the statutory provisions under Section 274 that entertainment expenditures are not deductible. This includes the cost of facilities used in connection with entertainment. Entertainment expenses constitute anything used for entertainment, amusement, or recreation purposes. Examples included: bars, theaters, country clubs, golf, and sporting events. This includes any dues or fees to the recreational club/organization as well.
Final regulations provide that if something is generally considered as entertainment, it will be treated as such and is nondeductible. However, there are exceptions depending on the nature of the business. A golf trip would generally be considered entertainment, unless it is provided for a golf-lesson business (See Regs. Secs. 1.274-11(b) (1) (iii) for more detail).
Meals: Taxpayers may deduct 50% of meals if 3 criteria are met:
- Expense is not lavish or extravagant under the circumstances.
- The taxpayer, or employee, is present at the furnishing of the food and beverage.
- Food and beverages are provided to the taxpayer or business associate.
The third point clarifies, that sole proprietors can buy food for themselves (the taxpayer) and have the 50% meal deduction. Also, do note that the term “business associate” is defined broadly by the IRS. This could be a customer the taxpayer is engaging with, or a client, supplier, employee, agent, etc). Also, do note that travel meals are deductible.
The IRS also clarified deductibility in the instance of meals and entertainment at the same occasion. The entertainment costs are nondeductible. If the meals were separately purchased at the time of entertainment, they are eligible for the 50% deduction. But if the meals with included in the price of entertainment, they will not be deductible. For example, if two employees bought dinner at a sporting event, the meal could be eligible for a 50% deduction. But, if the cost of food and beverage was included in the price of the golf tickets, it will not be deductible.
A new exception for the 50% meal deduction: The Consolidated Appropriations Acts of 2021 enacted a temporary exception to the meals limitation for amounts paid after 12/31/2020 and before 1/1/2023 for restaurants. For 50% eligible meals and beverages, restaurants now can take a 100% deduction. The notice clarifies that a restaurant means a business that both prepares and sells food for immediate consumption, regardless of whether the food or business is consumed on the business’s premise. See IRS Notice 2021-25 for more details.
Lindsey Carman, CPA, is a Staff Accountant at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.