The full deduction applies to any business-related restaurant meals from the beginning of 2020 to the end of 2022.
From Jan. 1 of this year to the end of 2022, business-related restaurant meals and drinks are 100 percent tax-deductible.
That’s thanks to the Consolidated Appropriations Act Congress passed in 2020. In 2023, all business-related restaurant meals will go back to the regular rate of 50 percent deductible.
The act is meant to help restaurants financially recover from the pandemic — but it could also mean huge tax savings for you and your business.
What you can fully deduct
When the Tax Cuts and Jobs Act was passed in 2017, business owners were worried because it eliminated deductions for “entertainment, amusement or recreation” costs, according to the IRS. Later, the IRS clarified that didn’t include food and drinks, as long as:
- They weren’t “lavish or extravagant” under the circumstances
- The taxpayer (or employee of the taxpayer) was present
- The food and beverages are provided to a business associate
Those qualifications apply for the traditional 50 percent deduction. In order to be 100 percent deductible, your business-related meal still has to meet those qualifications and be purchased from a restaurant. The IRS’ newer guidance defines a restaurant as “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.”
In other words, here’s what qualifies for 100 percent deduction:
- Food and drinks from restaurants
- Take-out food and drinks from restaurants
- Sales tax, delivery fees and tips from your restaurant purchase
What you can’t fully deduct
Unfortunately, the list for what doesn’t qualify is a lot longer than that. The IRS’ guidance makes the exceptions to this very clear.
The main disqualification for the full restaurant deduction is whether the place you’re buying from primarily sells “pre-packaged food and beverages that aren’t for immediate consumption.” So that includes these, the IRS says:
- Grocery stores
- Specialty food stores
- Beer, wine or liquor stores
- Drug stores
- Convenience stores
- Vending machines
If you have an “eating facility” directly at your business, that won’t cut it, either — even if it is a third party vendor. Here are the other IRS exceptions:
- Any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income
- Any employer-operated facility treated as a de minimis fringe … even if such eating facility is operated by a third party under contract with the employer
How you should take advantage
This is good news for both your business and the restaurant industry. They’re making money while you’re saving money.
Now that you know what qualifies for a full deduction and what doesn’t, keep these tips in mind to get the most out of this rule while it lasts.
Do more of your business at restaurants
If you have frequent meetings with an employee or associate where you’re providing food, this should now factor into your decision. Restaurant meals and drinks will likely be pricier than pre-packaged sandwiches from a grocery store, for example. Budget ahead of time and figure out if the pricier meals are worth the tax savings.
Not sure if something is a “restaurant?” Keep it on the safe side
Even though the IRS lays out a lot of exceptions to the rule, there’s still some gray area. Does a hot meal from Whole Foods count since that’s primarily groceries? What about a food truck? If you’re not sure, assume anything that’s not a traditional restaurant will be a 50 percent deduction.
Separate entertainment costs from food costs
Remember that the Tax Cuts and Jobs Act eliminated deductions for entertainment costs. Since restaurants and entertainment can often go hand-in-hand, it’s important to separate those costs for your taxes. Let’s say you’re out with a client at a food festival that has live music, and you pay an admission fee that includes unlimited food. Since your food payment is bundled with your entertainment one, it won’t be eligible. So pay for food and drinks separately when you can.
The bottom line
Business-related meals and drinks from restaurants are fully deductible until 2023. They would normally be 50 percent deductible, but Congress passed this change to help restaurants financially recover from the pandemic.
This means that you should take advantage of this rule while it lasts. Knowing these changes can help you lower next year’s tax bill and keep more money in your pocket to grow your business.
It’s hard to keep track of every deduction you could possibly qualify for. That’s why we do it for you. Schedule a free call with a DiMercurio Advisors team member today to learn more about building a tax strategy for your business.