8749 / What special rules apply when a taxpayer deducts business-related entertainment expenses and meals?

Editor’s Note: Congress lifted the 50 percent cap for 2021 and 2022, so that business meals were fully deductible under the 2020 year-end Consolidated Appropriations Act (CAA). This change was designed to support the restaurant industry during the COVID-19 recovery efforts, and, as such, the deduction was limited to food and beverages purchased in a restaurant. IRS guidance clarified that “restaurants” for this purpose include only businesses that prepare and sell food or beverages to customers for immediate consumption on the premises or off the premises. Pre-packaged meals and goods that are purchased for consumption at a later time, such as from a grocery store or convenience store, did not qualify. Meals provided through an employer-operated eating facility were not eligible for the 100 percent deduction even if the employer contracted with a third-party vendor to supply the meals. As is typically the case, the deduction was subject to the caveat that the meal expense was not lavish or extravagant.¹

Editor’s Note: Under the 2017 tax reform legislation, the previously existing 50 percent deduction for entertainment expenses that are directly connected with a business activity was suspended for 2018-2025. This applies to any activity considered entertainment, recreation or amusement, including membership dues with respect to any club organized for business, pleasure, recreational or social purposes.²

The 50 percent deduction for meal expenses remains in effect (including meals consumed while travelling for business). The 2017 tax reform legislation expanded the 50 percent deduction for meals to include expenses associated with providing meals through an eating facility meeting de minimis fringe benefit requirements ( Q 8910).³ The deduction for meals provided at the convenience of the employer expires after December 31, 2025.⁴