10 minute read
The meals and entertainment deduction has been tweaked so many times in the past four years that it’s been difficult for business owners to know which expenses are deductible and which expenses are disallowed. But being familiar with the M&E rules is important. Failing to deduct an expense to which you’re entitled can have a noticeable impact on your tax liability, and if your business has been affected by COVID-19, these deductions are more important than ever.
Before we dive deep into the M&E rules for 2021, let’s look at how the deduction has changed over the past few years.
Before the Tax Cuts and Jobs Act (TCJA) was passed, the M&E deduction was at its most generous. In general, business owners could deduct:
This changed when Congress enacted the TCJA.
Beginning in 2018, the TCJA limited the M&E deduction in the following ways:
But then, the COVID-19 pandemic hit. When the pandemic took its toll on small businesses, lawmakers sought to reinstate some of the M&E deductions that were disallowed by the TCJA – but only for a limited time.
The Consolidated Appropriations Act (CAA) overrode the TCJA by instituting temporary rules for M&E deductions. For 2021 and 2022 only, the CAA revived the following M&E deductions:
Entertainment costs remain nondeductible.
In 2023, the M&E deduction will revert to TCJA-era rules, making meals once again more difficult to deduct.
Once you understand which tax law governs your tax return, you must be able to correctly categorize your expenses.
Make sure your accounting department can create separate accounts on the general ledger for each type of M&E expense you want to track. Here are some M&E expense categories you should consider:
Ex: You provide coffee and snacks in the break room for employees on occasion.
Ex: You provide food to your employees for the required annual all-hands meeting.
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Ex: You encourage staff to finish a project by providing meals for those who work overtime.
Ex: Your employees are reimbursed for meals they consume while on a business trip.
Ex: You meet a client or a business prospect for lunch and pay for both meals.
Ex: You provide both food and entertainment at your annual holiday party.
Ex: You buy baseball tickets for employees, clients, or prospects and pays for all the food they consume that evening.
Here is a meals and entertainment chart that can help you determine how each of these categories should be taxed in a given tax year.
| 2017 and Prior Pre-TCJA | 2018-2020 TCJA | 2021-2022 CAA (supersedes prior column) | |
| Office Snacks | 50% | 50% | 50% |
| Office Meals | 50% | 50% | 100%2 |
| Meals for Convenience of the Employer | 100% | 50% | 100%2 |
| Travel Meals | 50% | 50% | 100%2 |
| Business Meals | 50% | 50% | 100%2 |
| Company Party | 100% | 100% | 100% |
| Entertainment Food1 Entertainment | 50% 50% | 50% 0% | 100%2 0% |
1 if separately stated on the invoice 2 if purchased from a restaurant, otherwise 50%
The M&E deduction in 2021 and 2022 is great for small businesses, but the CAA wasn’t perfectly clear on how to apply the law. To help provide clarity, the IRS released Notice 2021-25.
This notice says that business owners can take a 100% M&E deduction for food purchased from a restaurant. For purposes of the 2021 and 2022 meals deduction, the term “restaurant” is quite specific.
The term “restaurant” is a business that sells food for immediate consumption, even if the food is not immediately consumed.
This flexibility allows you to purchase food to-go from a restaurant and serve it at the office. This also means that grocery stores, specialty food stores, liquor stores, convenience stores, and vending machines that sell pre-packaged food do not qualify. If food is purchased from one of these non-restaurant establishments, you can still take a deduction for 50% of the costs.
The term “restaurant” does not include on-site eating facilities.
On-site eating facilities that provide meals to employees are not considered restaurants, even if the facility is operated by a third party. For example, if you run a hospital and pay for employees to eat in the cafeteria, those costs would not qualify for the 100% deduction. The one exception to this rule is if the food costs are includable in the employees’ gross wages. If the food provided at these facilities is treated as a taxable fringe benefit, it would be 100% deductible.
And, as with all ordinary and necessary business expenses, the M&E expenses cannot be lavish or extravagant to qualify for the deduction.
Educate yourself on what to expect. The M&E deduction is set for 2021 and 2022, but it will revert to TCJA-era rules in 2023. It’s also possible that the Biden administration will create its own tax laws that change the M&E deduction. You can manage these changes if you:
Create new M&E accounts.
Segregating meals expenses will be helpful. Even though in 2021 and 2022 most meals expenses are fully deductible, this won’t be the case in 2023. If you can use more M&E accounts now – creating an account for each category of expense – your job will be that much easier when it’s time to file your tax return.
Categorize meals expenses as they are incurred.
If you wait until the end of the year to put the meal costs into the appropriate bucket, you may not remember why those expenses were incurred. You won’t want to go back at the end of the year to decipher which expenses qualify for the full deduction.
Get itemized receipts.
If you provide any sort of entertainment alongside meals expenses, be sure to get itemized receipts. If meals are separately stated from the entertainment activity, the food is still deductible. If the food and entertainment expenses are grouped together, you cannot deduct any meals expense, even if you estimate the costs.
Use software to show how the changes to the M&E deduction will affect your tax position.
Our Corvee tax planning software can predict how the loss of an M&E deduction will affect your bottom line.
See how Corvee allows your firm to break free of the tax prep cycle and begin making the profits you deserve.
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