Meals and entertainment deductions for businesses in 2021

Business write-offs or tax deductions are expenses that you are able to deduct from your taxable income so that you pay a smaller tax bill. However, the IRS has rules about what you can and can’t deduct as well as the percentage of the expense that is deductible.

Business write-offs can result in hundreds, if not thousands of dollars, of savings on your taxes. Some examples of small business tax deductions that are commonly available to sole proprietors, partnerships, and LLCs include advertising and promotions, business insurance, business interest and bank fees, business use of your car, legal and professional fees, rent expenses, and business meals and entertainment.

When it comes to deductions for business meals and entertainment, things can get confusing because, whether an expense is deductible or not, depends upon the purpose of the meal or event and who is the beneficiary.

Recent changes to the tax laws as part of the Consolidated Appropriations Act signed into law on December 27, 2020 now allow food and beverages to be deductible at 100% as long as they’re purchased from a restaurant. This temporary 100% deduction was intended to help restaurants that may have been significantly impacted by COVID-19.

The basics

In 2018, Congress passed the Tax Cuts and Jobs Act which resulted in some big changes to deductions for meals and entertainment. Expenses for entertaining clients such as a round of golf, tickets to a concert or sporting event are no longer deductible.

Meals and entertainment are 100% deductible if the food and beverages are provided for by a restaurant. The term “restaurant” applies to a business that prepares and sells food and/or beverages to retail customers for immediate consumption; the food and beverages don’t have to be consumed on the premises. A company-wide party is still 100% deductible as are food and beverages provided free of charge to the public, and food included as taxable compensation to employees and included on their W-2 forms.

A 50% deduction applies to food or beverages purchased at businesses that primarily sell pre-packaged food and/or beverages, not for immediate consumption, for business meals with clients.. This includes grocery stores, liquor stores, convenience stores, specialty food stores, and kiosks. Office snacks or meals purchased at a vending machine, food for a board meeting, or providing dinner work for late-working employees, for example, fall under this category.

Working with someone who knows the particulars

If you’re trying to take advantage of all the different types of business meal and entertainment deductions, you need to know about how new rules classify deductions and percentages vs. old rules. Some things are 0% deductible, some are deductible at 50%, while others are 100% deductible. Hiring a CPA for your business can take the stress out of determining what your business can deduct and at what percentage.

GYL CPAs and Adviser is a full-service accounting and business consulting firm designed to meet all the financial needs of your business. We provide tax planning and return preparations for corporations, partnerships, and LLCs/LLPs. Call our office to schedule a free consultation with one of the members of our team.