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COVID-Era Meals and Entertainment Rules

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 client’s 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.

2017 and Prior

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:

  • 50% for entertainment
  • 50% for most meals
  • 100% for some meals

This changed when Congress enacted the TCJA.

2018 – 2020

Beginning in 2018, the TCJA limited the M&E deduction in the following ways:

  • Entertainment costs became nondeductible.
  • Some meals dropped from 100% to 50% deductible.

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.

2021-2022

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:

  • Some meals that have always been 50% deductible are awarded a 100% deduction if the food is purchased from a restaurant.
  • Most meals that were dropped to 50% deductible by the TCJA are brought back up to their original 100% allowance if the food is purchased from a restaurant.

Entertainment costs remain nondeductible.

In 2023, the M&E deduction will revert to TCJA-era rules, making meals once again more difficult to deduct.

Meals and Entertainment Categories

Once you understand which tax law governs your client’s tax return, you must be able to correctly categorize their expenses.

Ask your client if their 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 can suggest to your clients:

Office Snacks

Ex: Your client provides coffee and snacks in the break room for employees on occasion.

Office Meals

Ex: Your client provides food to their employees for the required annual all-hands meeting.

Meals for the Convenience of the Employer

Ex: Your client encourages staff to finish a project by providing meals for those who work overtime.

Travel Meals

Ex: Your client’s employees are reimbursed for meals they consume while on a business trip.

Business Meals

Ex: Your client meets a client or a business prospect for lunch and pays for both meals.

Company Party

Ex: Your client provides both food and entertainment at its annual holiday party.

Entertainment

Ex: Your client buys 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.

M&E Deductions Allowed

2017 and Prior
Pre-TCJA
2018-2020
TCJA
2021-2022
CAA
(supersedes prior column)
Office Snacks50%50%50%
Office Meals50%50%100%2
Meals for Convenience of the Employer100%50%100%2
Travel Meals50%50%100%2
Business Meals50%50%100%2
Company Party100%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%

M&E Deduction in 2021 and 2022

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 your client 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, your client 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 your client is a hospital and they pay for employees to eat in their 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.

Accounting for M&E Expenses in 2021 and Beyond

How can you help your clients today?

Educate your clients 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 help them manage these changes if you:

Encourage your client to create new M&E accounts.

Segregating meals expenses will be helpful to both you and your client. Even though in 2021 and 2022 most meals expenses are fully deductible, this won’t be the case in 2023. If you can get your clients to 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 their tax return.

Encourage your clients to categorize meals expenses as they are incurred.

If they wait until the end of the year to put the meal costs into the appropriate bucket, they may not remember why those expenses were incurred. You won’t want to ask your client to go back at the end of the year to decipher which expenses qualify for the full deduction.

Encourage your clients to get itemized receipts.

If your clients provide any sort of entertainment alongside meals expenses, encourage them 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 your clients how the changes to the M&E deduction will affect their tax position.

Our Corvee tax planning software can predict how the loss of an M&E deduction will affect your client’s bottom line. Rely on these tools to help your clients plan for the future.

To request a demo of Corvee’s tax planning software, reach out to us today.

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