The Meals and Entertainment deduction (M&E) was severely limited by the Tax Cuts and Jobs Act (TCJA). However, due to the impact of the COVID-19 pandemic on the restaurant industry, Congress saw an opportunity to revitalize the M&E deduction when passing the Consolidated Appropriations Act, 2021 (CAA).
Originally, the TCJA provided that, for expenses incurred or paid after December 31, 2017, there is no deduction allowed with respect to an activity generally considered to be entertainment, amusement or recreation expenses that are directly related to or associated with the active conduct of the taxpayer's trade or business. This change to the entertainment deduction was a departure from the traditional rule that entertainment expenses should receive a 50% deduction. However, taxpayers were still allowed a deduction of 50% of the food and beverage expenses associated with operating their trade or business. This effectively meant that if a taxpayer brought a client out for a round of golf and dinner, they would not be allowed to deduct any expenses for the golf but would be allowed a 50% deduction for the cost of the dinner.
Now, the CAA has temporarily amended the M&E deduction to allow for a 100% deduction for meal expenses. It applies to any food or beverage expenses provided by a restaurant, incurred after December 31, 2020 and before January 1, 2023.
Applying this change to the scenario discussed previously, if the taxpayer brought a client out for a round of golf and dinner, they are still no longer allowed a deduction for expenses related to the golf but are now allowed a 100% deduction for the cost of the dinner.
IRS Notice 2021-25 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. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.
Although entertainment expenses are still not deductible, the M&E deduction should be capturing the attention of taxpayers in diners and steakhouses everywhere.
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