Who doesn’t love a delicious bite to eat? Providing meals and snacks to employees and business associates helps build rapport, increases motivation and satisfaction, and can even improve productivity. And you can have your cake and eat it too, knowing that you can deduct 100% of certain business meals and entertainment expenses in 2022.
Shifting rules about meals and entertainment deductions
Before the Tax Cuts and Jobs Act (TCJA) of 2017, business owners lowered their tax liability by deducting meal and entertainment expenses incurred while doing business. When the TCJA came into effect, however, it took most entertainment deductions (such as theater or football tickets, or the costs of a round of golf) off the table. What the law didn’t cover was the cost of meals, beverages, and snacks that often accompany entertainment activities, leaving many companies wondering if these are deductible. In October 2020, the IRS issued final regulations clarifying that taxpayers could still deduct 50% of business-related meal expenses under the TCJA.
However, the 2020 Consolidated Appropriations Act (CAA) changed deductions for business meals in tax years 2021 and 2022, allowing businesses to fully deduct business meals that would typically be 50% deductible. To stimulate the restaurant industry with a temporary boost, food and beverages provided by a restaurant would be 100% deductible in 2021 and 2022, subject to IRS regulations. We expect the deduction to drop back to 50% in 2023—so it’s time to make the most of the 100% deduction while you still can.
Here are four ways you can make the most of business meal deductions in 2022.
1. Bring in food for your employees
Expenses for food and beverages provided on the business premises primarily for the benefit of employees are 100% deductible as long as the meal comes from a restaurant. This rule applies to wide range of employee activities, such as office parties, team building days, etc. If you choose to go offsite for these activities, the cost of the facility may be fully deductible too.
2. Build relationships over a good meal
If an employee takes a client or customer out for a meal at a restaurant, you’ll be able to deduct 100% of the cost as long as the meal isn’t overly lavish. The relationship could be with anyone the taxpayer or employee could reasonably interact with in the active conduct of business—including current or prospective customers, clients, suppliers, employees, agents, partners, and professional advisors.
3. Hit the road
Meals from restaurants during business travel are 100% deductible in 2022. Just remember that long-standing rules for substantiating meal expenses still apply. For example, deductions are not allowed for meal expenses incurred during business travel by those who aren’t business associates (such as spouses, dependents, or other individuals).
4. Offer snacks to your customers
Make your customers feel at home, create a positive association with your business, and take a tax deduction! Expenses for food and beverages that are made available to the general public (such as the customers who come to see you at your premises) are deductible in full. In this case, the food does not need to come from a restaurant to qualify for the 100% deduction.
Are takeout and delivery meals deductible?
Restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption, including takeout and delivery meals. However, you won’t get the 100% deduction when buying food from a business that sells pre-packaged food, such as a grocery or convenience store. When in doubt, think of it like this: the food must be intended for immediate consumption.
To qualify for the 100% deduction on food and beverages:
- The business owner or an employee of the business must be present when food or beverages are provided.
- The meal must have a legitimate business purpose.
- Keep in mind that the IRS generally places additional scrutiny on lavish or extravagant expenses.
- You may not treat certain employer-operated eating facilities or cafeterias as restaurants, even if they are operated under contract by a third party.
- Meals must be provided by a restaurant—not a grocery store or convenience store.
What about entertainment costs?
Even under the CCA, entertainment expenses are not deductible. However, you can claim a deduction for amounts paid for food and beverages provided at or during an entertainment activity. These must be listed separately on the invoice or purchased separately. A classic example is the purchase of food and drinks at a sporting event. The tickets are not deductible; the food and beverages, on the other hand, qualify at 100% through the end of 2022.
Bookkeeping tips for tracking business meal expenses
- Create a new account for expenses that are strictly for business entertainment purposes and designate business meals
- Keep travel expenses (including meals while traveling) completely separate from entertainment
- Create a separate category for employee social meals, such as parties, picnics, team building events, staff mentoring, etc.
Not sure what business expenses are deductible?
Download our free comprehensive Guide to Small Business Tax Deductions or reach out to our team to schedule a consultation.