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IRS Issues Final Regulations on Meals and Entertainment Deduction

October 21, 2020

Good news, restaurants. Employee shift meals remain 100% deductible under new regulations on the meals and entertainment deduction. What about other entertainment expenses?

The Internal Revenue Service (IRS) has issued final regulations relating to the limitation on the meals and entertainment deduction. Though the regulations confirm that entertainment expenses are not deductible, they do not clarify the partial or full deductibility of meal expenses. We dive into the regulations here.

What is the meals and entertainment tax deduction?

It’s no secret that sometimes the best business deals and conversations happen over lunch, during a round of golf, or on the sidelines of a football game. When it comes to deducting these expenses, the IRS wants to know that business was actually talked about and you weren’t simply enjoying a meal with an employee or client. Other IRS requirements included:

  1. The IRS has limits on how much you can deduct- Only 50% of business-related meal and entertainment expenses were permitted as a deduction, prior to 2018.
  2. Prior to 2018, you must keep records of entertainment related outings- Beyond receipts, this includes a record of who was there, when it occurred and what business was discussed.

TCJA changes

The Tax Cuts and Jobs Act, put in place in December 2017, eliminated the deduction for any expenses related to activities typically considered to be for entertainment, amusement or recreation. Business-related meals remain 50% deductible. Employee shift meals and office parties remain 100% deductible.

New regulations

The final regulations, put in place September 30, 2020 confirm that:

  • Employee shift meals are fully deductible
  • While entertainment expenses are not deductible, 50% of food and beverage costs incurred during the activity may be deductible (provided the food and beverage costs can be segregated from the overall cost of the outing)
  • Meal expenses of a recreational or social activity for employees are typically 100% deductible. Holiday parties, picnics and outings are deductible provided they are not in favor of highly compensated employees.
  • When it comes to break room snacks (free coffee, soda, snacks, etc.) employers may only deduct 50% of expenses.
  • When traveling on business, meals are tax deductible only if the expenses are not lavish, and as long as the taxpayer (or an employee of the taxpayer) is present at the time the meals are consumed.

This is definitely good news for the restaurant sector. Do you have questions on your expenses and if they qualify? We can help.

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