How to Deduct Business Meals and Entertainment

At some point in 2017, the IRS disallowed tax deductions on business meals and entertainment. A 50% deduction is allowed when entertaining a potential or current business contact. As for employers' expenses for meal provision or entertainment for employees, IRS termed such as non-deductible.

As of December 27, 2020, the regulation was adjusted for the next two years; 2021 and 2022.  Meals which include beverages are now fully deductible. So, what other things are fully deductible over the next two years?  

Fully Deductible Business Meal and Entertainment Expenses

Fully deductible means the cost of such meals is 100% deductible come tax filing period.

If included in compensation, meals, and entertainment for employees are 100% deductible. Also fully deductible is a company party( possibly a holiday party). Fundraising events or a charity event where meals are provided for the public, this expense is fully deductible as well.

As much as there are exceptions as mentioned above to allow full deductions, only 50% deductions are permitted in some cases.

50% Deductible Business Meal and Entertainment Expenses

As mentioned earlier, the 50% deductibles for the next two years means only half of the expenses on such entertainment can be deducted.

One example is employees' meals while on a business trip. Only 50% of the meal cost which is not lavish can be deducted. Meals provided by a taxpayer for a client either potential or existing qualifies for a 50% deduction provided it's not extravagant and work is discussed. Food for board meetings, meals for employees working late hours, or employee treats is 50% deductible. 

Having considered meal deductibles, let's examine entertainment deductibles. 

When it comes to entertainment, things are a little different. Entertainment expenses are not deductible anymore as some rules have been adjusted. Numerous forms of entertainment expenses are regarded as non-deductible. Activities such as payment for games events, country clubs membership fees, and use of an entertainment facility. 

The rules can be confusing but here's a good example to help. Suppose a taxpayer invites a business contact to an entertainment event to discuss business. Then the taxpayer purchased two tickets and simple snacks for both parties, the tickets for both are non-deductible while 50% can be deducted from the cost of meals purchased.  

Non-Deductible Business Meal and Entertainment Expenses

Quite a few activities are non-deductible, especially if a business contact reimburses the expenses spent on meals or if the meals are served as compensation. 

Meals as Compensation

For example, if a taxpayer provides a meal for an employee or business contact to compensate for wages or services rendered, then the 50% deduction is disallowed. 

Example 2: If a business Mrs. X reimburses a taxpayer, Mr. Y, for every amount spent on meals and recreation he can't deduct 50% off his expenses since the amount spent has been returned to him.

Dining with Spouse or Friends

Another non-deductible expense is if your spouse or friends are present at a business meeting, the cost of their meals is exempted from the 50% deduction. Paying for a client's meal without the presence of the taxpayer on sit, the expenses are not deductible. 

Advertising

Advertisement expenses which may include the provision of meals for the public as means to advertise a business are not subject to 50% deduction, it's a nondeductible cost. 

How do you know if a meal or entertainment expense is deductible?

For further clarification or specifics, get a financial advisor to help discern what is applicable in different situations to avoid errors. An expert financial service will help each business owner take the advantage of tax deductions in a business. More importantly, to file accurately and avoid assuming deduction wrongly. 

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