Changes to meal expense for tax year 2021

Written by: Brian Christensen

When the Consolidated Appropriations Act, 2021, was signed into law, one of the tax provisions affected was the deductibility of meals expense. Historically, eligible meals were subject to a 50% deduction. Meaning, if a taxpayer paid $50 for an eligible meal (discussed below), the taxpayer would be eligible to deduct $25 on their tax return. The Act allows for certain meals to be deducted 100%, which would mean the taxpayer would be able to deduct the full $50 as an expense. In this article, we’ll discuss what criteria must be met for the meals to be eligible for the 100% deduction.

Under IRC Section 274(k), in order for a deduction of meals expense, the following criteria must be met:

  • The expense is not “lavish or extravagant” under the circumstances,
  • The expense is ordinary and necessary,
  • The taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverages, and
  • The food and beverages are provided to the taxpayer or a business associate (such as a customer, vendor, consultant or employee).

Beginning on January 1, 2021 through December 31, 2022, the taxpayer would be able to deduct 100% of the meal expense under IRC Section 274(n)(2)(D) if the following criterion was met:

  • The food or beverage must be provided by a restaurant. In order for the location to qualify as a “restaurant”, the IRS states in Notice 2021-25 the location “prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises”.

The IRS explicitly states the following locations do not qualify as a restaurant: “grocery store; specialty food store; beer, wine or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk”. Although the expense incurred at these locations are not eligible for the temporary 100% deduction, they are still eligible for the 50% deduction if the criteria under IRC Section 274(k) are met.

A common expense that often goes hand-in-hand with meals expense is entertainment expense. The Act did not make any changes to the treatment of entertainment expenses (still non-deductible). If a taxpayer goes to an event where admission covers both entertainment and meals, it is important that the taxpayer gets an itemized receipt to determine the amount paid for entertainment (non-deductible) and the amount paid for meals (eligible for deduction).

 

Matters discussed in this article are subject to change and are for informational purposes only. Contact a Widmer Roel professional for current information on this subject. Widmer Roel PC will not be held responsible for any claim, loss, damage or inconvenience caused as a result of this information.