Deductibility of Meals and Entertainment

The rules around meals and entertainment have changed several times over the past few years. The current provisions are set to expire at the end of 2022, so we wanted to share the current rules and what to expect for 2023.

Prior to the Tax Cuts and Jobs Act (TCJA) of 2018, both meals and entertainment were 50% deductible. The TCJA made entertainment nondeductible, but allowed meals to continue to be 50% deductible.

As part of the Consolidation Appropriations Act of 2021, business meals and beverages are 100% deductible if purchased from a restaurant in 2021 or 2022. This was designed to help restaurants struggling during the COVID-19 pandemic.

Starting January 1, 2023, meals and beverages will revert to 50% deductible, aside from the exceptions mentioned below that will continue to be 100% deductible. Entertainment will continue to be nondeductible through 2025.

Certain meals and entertainment are 100% deductible, regardless of which tax year they occur. Examples include the following:

• Recreational, social, or similar activities for employees (such as holiday parties)
• Meals and entertainment provided for advertising or goodwill
• Selling meals to the public
• Team-building activities for employees
• Recreational expenses related to employees such as holiday parties or summer picnics
• Business meetings or conventions of certain exempt organizations such as business leagues, chambers of commerce, or professional associations
• Expenses related to your type of business (e.g., a fashion company hosting a fashion show to introduce new designs)

Meals

To qualify for the 100% meal deduction in 2022, the following rules apply:

• Business owner or employee must be present when the food or beverages are provided.
• Meals must be from a restaurant, which includes businesses that prepare and sell food or beverages to retail customers for immediate on- or off-premises consumption.
• Expenses cannot be lavish or extravagant. There is no dollar threshold, but the expense must be reasonable based on the facts and circumstances.
  Meals and beverages are limited to a 50% deduction if the purchases are from grocery stores, convenient stores, or businesses that primarily sell pre-packaged goods not for immediate consumption, which do not qualify as restaurants.

Entertainment

Entertainment, amusement, and recreation expenses, like sporting events or tickets to shows, are nondeductible in 2022–2025. The cost of meals and beverages provided during an entertainment event are deductible if they are paid for separately from the entertainment (e.g., food purchased at a sporting event concession stand), or if the meals are separately billed from the cost of entertainment on one or more bills, invoices, or receipts.

Examples of entertainment expenses that are nondeductible include entertaining guests at any of the following:

• • Social, athletic, or sporting clubs
  • Theatres
  • Sporting events
  • On yachts
  • On hunting, fishing, vacation, or similar trips
  • Meeting the personal, living, or family needs of individuals, such as providing meals, hotel stays, or cars to customers or their families
  • Golf outings
  • Night clubs
  • Costs of an entertainment facility that is used for entertainment (e.g., yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suit, or home in a vacation resort)
  • Club dues and membership fees for any club organized for business, pleasure, recreation, or other social purpose (e.g., country clubs, gold and athletic clubs, airline clubs, hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business decisions)
  • There are special rules that apply to entertainment gifts. If you give tickets to a play or an event to clients, the general rule is that any item that could be considered a gift or entertainment must be considered entertainment—and therefore nondeductible. If you attend the event with a client, it is considered entertainment. If you give the tickets away and do not attend the event yourself, you have the choice of determining whether an item is either a gift or entertainment expense. Gifts are limited to $25 per person, per year.

Business deductions frequently change, and the 100% deduction is set to expire on December 31, 2022. Meals will be 50% deductible in 2023, and entertainment is set to be nondeductible through December 31, 2025. We will continue to update you if new legislation is passed.

Please reach out to your GMAG team if you have any questions or would like to discuss this topic in more detail.