The IRS says that the following types of entertainment qualify for the 100 percent employee entertainment tax deduction:
•Holiday parties, annual picnics, and summer outings
•Maintaining a swimming pool, baseball diamond, bowling alley, or golf course
The IRS makes it clear that the above are examples, and that other types of entertainment also qualify for the 100 percent deduction. The tax code states that "expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees" qualify for the 100 percent deduction.
Technically, the law requires that the entertainment expenses be primarily for the benefit of employees other than a tainted group, which consists of any of the following:
•A highly compensated employee (an employee who is paid more than $130,000 in 2021)
• Anyone (this likely includes you) who owns at least a 10 percent interest in your business, i.e., a "10 percent owner"
•Any member of the family of a 10 percent owner, i.e., brothers and sisters (including half-brothers and half-sisters); spouses; ancestors (parents, grandparents, etc.); and lineal descendants (children, grandchildren, etc., including adoptees)
Remember, as the business owner, you belong to the tainted group. That's not a big deal. You just need to make sure that partying with the employees is primarily for the benefit of the employees.
Now, thanks to a new law enacted December 27, 2020, new IRS regulations, and a new IRS notice (yep, all three are new), you have fresh opportunities for writing off 100 percent of your business meals.
For 2021 and 2022, you can deduct 100 percent of your business meals by paying attention to a few new, easy rules.
1.) The law requires only that the restaurant provide the food and beverages. You don't have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal that's delivered by Uber Eats or Grubhub. You can include the delivery fees and tip as a food and beverage expense. In other words, you can dine in the restaurant, order takeout, or use delivery.
2.) Your deductible business meals must be tax code Section 162 ordinary and necessary business expenses, and they must not be subject to disallowance under tax code Section 274. (We will fill you in on more details later)
3.) Per IRS regulations, you may not deduct lavish or extravagant business meals. You are not likely to have this problem, regardless of what you spend. Here's why:
•In its publication on entertainment expenses, the IRS states: "Meal expenses won't be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts."
•The Bloomberg BNA Tax Management Portfolio on entertainment deductions states: "No reported case to date has ever upheld a disallowance of a taxpayer's travel, entertainment, or meal expenses on the grounds that they were 'lavish and extravagant under the circumstances."'
4.) You must be present at the business meal, and you must provide the business meal to a person with whom you could reasonably expect to engage or deal with in the active conduct of your business, such as a customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.
A few things to keep in mind:
A restaurant is not "a business that primarily sells pre-packaged food or beverages not for immediate consumption," including, but not limited to, the following:
•Specialty food stores
•Beer, wine, or liquor stores
•Vending machines or kiosks
Here's a tip:
If you deduct your actual expenses instead of the per diem, you can shift your expenses to being 100 percent deductible for the next two years. For example, you are out of town overnight on business. You spend $10 for breakfast, $20 for lunch, $30 for dinner, and $5 for coffee during the day. You buy these items from locations that qualify as restaurants.
•If you use the per diem method, you can deduct only 50 percent of the $56 per diem, or $28.
•If you deduct your actual expenses, you can deduct 100 percent of the $65 you spent on food and beverages.
And because each of your meal expenses was under $75, you don't face a tax record-keeping difference because you don't need to keep receipts for business meals that are less than $75. However, you do need to make a record of them.
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