Deductibility of Meals Provided by Restaurants: Time to Update Your Trial Balance!
It’s no secret that COVID-19 precautions have hit many businesses hard. It’s also no secret that the restaurant industry has been one of the hardest hit sectors of the US economy.
When Congress passed new economic stimulus provisions as part of the Consolidated Appropriations Act (CAA) during December of 2020 they made some changes to how businesses can deduct meal expenses in an effort to help the restaurant industry recover. However, if you don’t understand the changes and make appropriate adjustments to your accounting system, you may not be able to capitalize on these changes.
What Changed With the New CAA In Regards to Business-Related Meals?
For many years, the tax code has restricted the ability of businesses to deduct business-related meals. While there are some exceptions, in general, businesses are only allowed to deduct 50% of meal expenses. With the passage of the CAA, the rules have been substantially loosened for two years. Congress has provided that when a business buys food or beverages from a restaurant during the period after December 31st, 2020 and before January 1, 2023, the 50% limitation will not apply.
It’s important to keep in mind that this 100% deductibility isn’t limited to meals eaten at a restaurant. Any food or drink purchased from a restaurant during this period qualifies for the 100% deduction. This means that takeout meals and catering will also qualify.
Requirements Needed to Claim the Deduction
Keep in mind though that while the 50% limitation goes away for two years, you do still have to meet the other requirements of the law to be able to claim the deduction. Specifically:
The food and beverages can’t be lavish or extravagant under the circumstances;
At least one owner or employee of the business must be present when the food and drink are served; and
The food and drink must be provided to a “business associate” such as current or prospective clients, suppliers, employees, etc.
Changes to Recordkeeping Will Be Required
For some businesses this could be a great tax benefit. However, it won’t do you much good without changes to your recordkeeping.
Many companies currently record all meal expenses to an account called “food”, “meals”, or something similar. They typically don’t separately track meals from restaurants. Without changes to your recordkeeping, you might not be able to tell which meals qualify for the higher deduction.
You will need to update your training for your bookkeeping staff. You may also need to make changes to your chart of accounts.
Some companies keep separate accounts for “100% deductible meals” and “50% deductible meals”. If you are in this category, you just need to train your bookkeeping staff that during the calendar years of 2021 and 2022, meals purchased from restaurants that would normally go in the “50%” category should be recorded in the “100%” category instead.
If you don’t currently put meals in separate accounts based on their tax deductibility, now would be a great time to start! The simplest thing to do would be to add a meals account called “meals purchased from restaurants” and make sure your bookkeeping staff knows how to use that account.
However, there are some other types of meals that were already 100% deductible (which is why some companies already have an account for them). You could break your meal accounts into the 50% and 100% variety and then train your staff on what other kinds of meals qualify as 100% deductible.
How SVA Can Help
To help the restaurant industry, Congress is allowing expanded deductibility of business meals for a two-year period. However, to take advantage of this opportunity, you need to understand how the new rules work and make sure you are properly tracking your expenses to identify those that qualify for the higher deduction.
If you have any questions or need help implementing recordkeeping to take advantage of 100% deductible restaurant meals, please reach out to an SVA tax adviser. We’d love to help you.
Jeffrey is a Senior Manager at SVA Certified Public Accountants and has extensive experience providing compliance support and consulting with clients on tax planning, structuring transactions, and reorganizing business structures.