Business owners and employees have long been conditioned to track all their expenses. Saving those receipts often pay off in the form of tax deductions that reduce business expenses and boost the bottom line.
Unfortunately, it’s difficult to know exactly what you can and can’t deduct from your taxes, especially when it comes to business expenses, meals, and entertainment. Determining what is and isn’t deductible can be a complicated process — even before you factor in complications created by the COVID-19 pandemic and new details that were included in the relief package Congress passed in December.
In this blog, we will provide an overview of which business expenses, meals, and entertainment you can deduct on your 2020 taxes.
(And if you still have any questions, contact S.H. Block Tax Services. Our team has the experience and expertise to help your business navigate any complicated questions or tax-related details.)
CONGRESS HAS UPDATED DEDUCTIBLE BUSINESS EXPENSES
“Wine and dine” is a common term for a strategy many businesses use to build and grow strong relationships with current and future clients. In the past, entertainment activities might have included fancy steak dinners, expensive bar tabs, front row concert tickets, sporting events, and rounds of golf at private country clubs. Prior to 2018, a lot of these fringe benefits might have qualified as a tax-deductible business expense.
But the Tax Cuts and Jobs Act of 2017 (TCJA) limited the tax benefits available to businesses looking to write off those expenses. Not only did it eliminate the ability to deduct entertainment expenses, but it reduced the amount you could deduct for meal and beverage expenses to 50%.
The most-recent coronavirus relief package, however, temporarily reversed that change for 2021 and 2022. Passed on December 21, 2020, the Consolidated Appropriations Act of 2020 (CAA) allows for full deductibility of specific business-related meals. In other words, business meal expenses incurred after December 31, 2020 and before January 1, 2023 could be eligible for a 100% deduction.
While the bill is expected to help the restaurant industry during the pandemic, it might also provide tax relief for businesses.
HERE’S WHAT YOU NEED TO KNOW ABOUT MEAL DEDUCTIONS
So, what does that mean for your 2020 taxes? Here is a list of qualifying expenses that you can deduct 100%:
- Food for company-wide holiday parties
- Food and beverages given out free to the public
- Food that is included as taxable compensation for employees and is included on their W-2 forms
Here are items that are 50% deductible:
- Business meals with clients
- Meals purchased for business travel
- Meals at conferences that are not included in the price of registration or tickets
- Meals with less than half of your company’s employees
- Meals for employees working late at the office
- Office snacks for the break room
Note that food and beverages you purchase from a restaurant in 2021 and 2022 will be 100% deductible.
IS ENTERTAINING CLIENTS TAX DEDUCTIBLE?
Unfortunately, there are still parts of the TCJA that seem a little vague.
For example, while it is generally assumed that takeout and delivery meals will be included as tax deductible items, the specific language of the bill did not make that clear. Fortunately, the Federal Register, the official journal of the U.S. federal government, reported that the IRS addressed this area and noted that tax deductible expenses included “the full cost of food or beverages, including any delivery fees, tips, and sales tax.” You should note, however, that travel expenses associated with driving to pick up takeout meals are not included.
Here are a few additional things you should keep in mind to ensure your meals are tax deductible:
- Meals cannot be extravagant or lavish. You might want to skip that expensive bottle of wine you’re only purchasing to impress a client.
- You or one of your employees must be present for business meetings when a meal is served. If you pay for a client’s food and beverage, but don’t go with them, then that is nondeductible.
- Food and beverages must be provided to you, your employees, prospective clients, customers, business associates, or someone you reasonably could expect to do business with or enjoy a business benefit. If a friend or spouse tags along, their meal is not deductible.
- Entertainment expenses will not be deductible, regardless of whether they occurred in 2020 or 2021.
Keep receipts and documentation related to your meal expenses. Regardless of the cost of meals, it’s a good idea to record the following information if it’s not included on a receipt:
- Date of the meal
- Total amount, including tax and tip
- Name of the restaurant
- Names of the people who attended the business meeting
- Details of the business purpose and details discussed
If you have questions about what is and isn’t deductible, contact an experienced tax attorney.
CONTACT S.H. BLOCK TAX SERVICES TODAY
If you need help with your business’ tax bill, please contact S.H. Block Tax Services today to speak with one of our skilled and experienced tax law lawyers. Our attorneys and support staff have years of experience helping small business owners identify useful tax credits and deductions. We also have certified and trustworthy bookkeepers who can help you keep accurate and detailed records all year long.
We also have an A+ rating with the Better Business Bureau and decades of experience with tax liabilities, bookkeeping, payroll and HR services, and more — so we’re equipped to handle all your financial and tax return needs.
Federal Register. (2020, October 9). Meals and Entertainment Expenses Under Section 274. Retrieved from: https://www.federalregister.gov/documents/2020/10/09/2020-21990/meals-and-entertainment-expenses-under-section-274
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.