Business Meal Tax Deductions
Different circumstances dictate different tax treatment of business meal tax deductions. Below, discover the situations in which 100% limit, 50% limit, and per diem costs apply.
100% Limit
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides that for tax years 2021 and 2022, 100% of the cost of business meals provided by restaurants is deductible. The purpose of this provision is to encourage spending at restaurants, which generally were hard-hit by the COVID-19 pandemic emergency lock-downs imposed to limit an individual’s contact with others. The eligibility conditions noted above for deducting business meals continue to apply.
Guidance from the IRS (Notice 2021-25) defines the term restaurant to mean a business that 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. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.
In addition, an employer may not treat as a restaurant any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income under IRC Sec 119, or any employer-operated eating facility treated as a de minimis fringe benefit even if such eating facility is operated by a third party under contract with the employer.
Treatment of Per Diem
Per Notice 2021-63, taxpayers using per diem amounts to substantiate the amount of ordinary and necessary business expense paid or incurred while traveling away from home, may treat the meal portion of a per diem rate or allowance paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, as being attributable to food or beverages provided by a restaurant (Notice 2021-63). Thus, they can use 100% of the per diem rate rather than only 50%.
Meals that qualify for the 100% limit still must meet the general qualifications for business meals as listed under “Qualifications” below.
50% Limit
Deductions for business meal expenses are limited to 50% of their cost, other than those eligible for the 100% deduction noted above. The 50% rule also covers the cost of meals during away-from home business travel. In addition, deductions for expenses related to the meals (e.g., taxes, tips and cover charges) are also limited to 50% of cost; however, this is not true for costs of transportation to and from the meal or entertainment location. Because they are not business related, the 50% limitation does not apply to the deduction of meals associated with medical or charitable travel which are allowed at 100% of the cost.
Qualifications
The qualification requirements for business meals are:
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The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business.
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The expense is not lavish or extravagant under the circumstances.
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The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages.
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The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact. Final regulation 1.274-12(b)(3) follows the definition of “business associate” as currently provided in §1.274-2(b)(2)(iii), i.e., that the food or beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”; and
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In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
“ Example – (This example was taken from Notice 2018-76) Taxpayer invites a business contact to a baseball game. The tickets to the game fall into the entertainment category and are not deductible. However, the taxpayer also purchased hot dogs and a beverage for himself and the business contact. Because food and drinks are purchased separately, they are not disallowed as entertainment and are deductible if they otherwise qualify as an ordinary and necessary business expense. Had the ticket price included the hot dogs and beverages, they would be treated as non-deductible entertainment. If the ticket price separately stated the ticket price and the food and beverage price, then the food and beverage portion would not be disallowed as entertainment ”
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Regulations
Regulations related to food/beverages at an entertainment activity generally incorporate the guidance in Notice 2018-76, but also:
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Provide that the amount charged for food or beverages on a bill, invoice, or receipt at an entertainment activity must reflect the venue's usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items. (Reg 1.274-11(b)(ii)),
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Provide that unless food or beverages provided at or during an entertainment activity are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts, no allocation can be made, and the entire amount is a non deductible entertainment expenditure. (Reg 1.274-11(b)(ii)),
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Clarify that the entertainment disallowance rule applies whether or not the expenditure for the activity is related to or associated with the active conduct of the taxpayer's trade or business.
Employer-Provided Meals
As noted in #4 above, the final regulations consider employees as a type of business associate for the purpose of the deduction for expenses for meals provided by an employer. The 50% rule will apply to employers providing meals through an in-house cafeteria effective for 2018 through 2025. (IRC Sec. 274(n)(2) as amended by TCJA Sec. 13304(b)(1)). Previously the employer could deduct 100% of these costs. And as of January 1, 2026, an employer’s deduction for meals for the convenience of the employer, including in-house cafeterias, is disallowed. (IRC Sec. 274(o) as amended by TCJA Sec. 13304(d)(2)).
The 100% deduction for restaurant-provided meals available for 2021 and 2022 does not apply for meals provided to employees when the value of the meals is excluded from the employees’ gross incomes.
50% Limit Restrictions
The 50% limit doesn't apply to:
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Expenses treated as compensation paid to an employee or otherwise included in the gross income of the recipient of the meal are fully taxable. (Code Sec. 274(n)(2)(A)),
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Meal expenses of an employee that are reimbursed are fully excludable. The percentage limit applies to the employer making the reimbursement. (Code Sec. 274(n)(2)(A)),
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Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section 414(q))) are fully deductible. For purposes of this paragraph, an individual owning less than a 10-percent interest in the taxpayer's trade or business shall not be considered a shareholder or other owner, and for such purposes an individual shall be treated as owning any interest owned by a member of his family (within the meaning of section 267(c)(4))., A highly compensated employee is an employee who:
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was a 5% owner at any time during the determination year or the preceding year, or
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for the preceding year, received more than $135,000 (2022), $130,000 (2021 and 2020) in compensation from the employer and, if the employer elects, also was in the “top-paid group” (top 20%) of employees for that year.
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Expenses for goods, services and facilities made available by the taxpayer to the general public are fully deductible. (Code Sec. 274(n)(2)(A))
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Expenses of goods, services, or use of facilities, sold by the taxpayer in a bona fide transaction (entertainment sold to customers) are fully deductible. (Code Sec. 274(n)(2)(A))
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Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors are not limited by the 50% rule. (Code sec 274(e)(5))