The IRS laid out anticipated guides for reducing business meals expenses. Taxpayers and tax advisors are expected to follow these regulations for verifying business meal expenses so that a reduction will be enacted. To make this work, documentation of costs remains essential.
Debate on deduction of the business meal has been a topic for long. Its sudden disentanglement from its noteworthy tax deduction equivalent has raised uncertainty about business meal deductions. With the adopted regulations by IRS in 2020, deduction of business meal expenses has been separated from entertainment. Restoration has been made on the deduction to its former magnitude.
The historical details on the deduction and final regulations of business meals taken while traveling away from home were examined in this article.
Brief History of Business Meal Tax Deduction
The deduction in the business meal is one of the controversial tax law issues, among the litigated business tax affairs reviewed by National Taxpayer Advocate (NTA) and in the federal courts and was the business travel expenses deduction. Other litigated issues were deduction and substantiation of business expenses. Thus, it appears that the catalyst for most disputes is over when business tax deductions can be claimed. This article aims to inform taxpayers in respect of business meals.
The business meal deduction was reduced to 80% and 50% in 1986 and 1994 consecutively. In 2021 and 2022, the business meal deduction was 100% for purchased meals in a restaurant.
There was confusion between business meals and entertainment. Congress failed in defining meals as a different concept from entertainment. Due to the age-old practice of treating business entertainment and meal as a foreign concept on a similar transaction, the continuous rationality of meal deduction induced the removal of entertainment deduction.
IRS Guidance
IRS issued interim rules until final rules were published in Oct. 2020. Entertainment was defined as any activity considered to establish delight or pleasure in the final regulations.
Meal deduction rules state that a taxpayer can deduct 50% of an allowable meal expense if:
The taxpayer’s employee or the taxpayer is at the food furnishing
The meal expense is not extravagant
The food is given to a taxpayer
In addition, food given during an entertainment activity is bought differently from the entertainment. In other words, the food price is separated from the cost of the entertainment on a receipt or more.
In the final version of the business meal deduction rules, the IRS altered the suggested regulations to describe people who are considered worthy receivers of reduced business meal tax, including taxpayers to the description.
The IRS defined business associate as that which addressed business conduct before references to deductions of business entertainment expenses eliminated by the TCJA.
Thus, one of the business meal deduction regulations includes a deductible business meal that provides for customers and employees within the scope of business-associate requirements. The regulation reads:
Business associate relates to the people the taxpayer is willing to engage with the taxpayer's business attitude. Business associates include the taxpayer's established or prospective supplier, customer, client, employee, adviser, partner, or agent.
Persons with whom a taxpayer cultivates goodwill can be partially included within the business associate scope for the deduction.
Business Meal Deduction Requirements
If you are a sole business owner, you can reduce necessary and ordinary entertainment and business meals expenses. However, the deductions must be within the scope of a business associate. You can deduct only to the extent that your employer doesn't reimburse you for an employee.
You must show the following to meet the directly-related requirement:
Entertainment purpose was the conduct of business
The business engagement occurred during the entertainment period
You expect business benefit
If you don't meet the directly-related requirement, you can deduct entertainment or meal expenses if you meet the associated test.
Conclusion
The business meal deduction provided by a restaurant went from 50% to 100% in 2021 and 2022. The IRS on April 8 issued Notice 2021-25 for deducting business meals. The notice provides essential details on when the temporary 100% reduction applies and when the standard 50% continues to apply.
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