In March of 2021, Congress enacted the American Rescue Plan that included many modifications to the preparation of 2021 business tax returns. The most significant aspect for businesses under IRS code section 274(n) is the change to the business meals expense deduction from 50% to 100%. There are conditions of course, which we outline below.
Businesses may deduct 100% of certain meal expenses through 2021 and 2022 if the expense meets the following tests:
- The expense isn’t lavish or extravagant under the circumstances,
- The taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverages, and
- The food or beverages are provided to the taxpayer or a business associate.
Within this section of the tax code, “business associate” means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business such as a customer, client, supplier, employee, agent, partner or professional advisor — whether established or prospective.
The IRS also issued Notice 20212-25 to provide further guidance on the higher limit for deducting business meals:
The 100% meal expense does not apply to packaged foods that may be sold at grocery stores, convenience stores, kiosks, vending machines, and the like.
The long-standing rules for substantiating meal expenses still apply to quality for the deduction, including that no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or another individual. For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.
Please reach out to us with any questions or clarification. Send us an email or give us a call at 317-636-5561. Please share the news of the deduction with your friends and families to help protect the vitality of the restaurant industry.