100% deduction for business meals in 2021 and 2022

Since the early 1990s, meals purchased while conducting business with a client, customer or vendor, or traveling out of town have been only 50% deductible for purposes of computing taxable business or self-employment income. The philosophy of the Presidential administration at the time was that people have to eat regardless of what they are doing and not wanting the government to be seen as heavily subsidizing the three-martini business lunch while still recognizing the jobs and economic activity provided by the restaurant industry. On April 8, 2021, the Internal Revenue Service issued Notice 2021-25, which made business meals 100% deductible, retroactive to January 1, 2021 and effective until December 31, 2022. Beginning January 1, 2023, the deduction reverts back to 50% unless additional guidance is issued stating otherwise. This guidance states that business meals must not be “lavish or extravagant” and you must be eating the meal while conducting business with a client, colleague or vendor, or traveling out of town for work. Also note that this deduction is generally only permitted with meals purchased at sit-down or take-out restaurants; any meals purchased at establishments that sell pre-packaged food or beverages not for immediate consumption, such as a grocery store, specialty food store, liquor store, drug store or convenience store as well as newsstands, vending machines or kiosks, do not qualify for this deduction.

If you take a client to a sporting event to entertain them while discussing business, and the stadium has some kind of sit-down restaurant or bar that serves food, or a food counter with no seating area where you can purchase a full meal, deductions for these purchases would probably be allowed; however, purchasing beer, hot dogs or popcorn from someone walking through the stadium or a smaller kiosk would probably be nondeductible. Undoubtedly, there will be a lot of disagreements during the subsequent audits over what was truly a “restaurant”. What is truly “lavish or extravagant” will be an even more obvious bone of contention; I would simply stay away from the five star restaurants and not make any premium liquor purchases during the meals. Most states will likely follow this temporary federal change on their returns as well, despite the potential loss of revenue (some states such as New Jersey have always treated them as 100% deductible).

Business meals have not been fully deductible on the federal returns since the early 1980s and this recent regulatory change is without a doubt an effort to stimulate the restaurant industry that has suffered badly during the Covid pandemic. Whether it is successful or not, only time will tell, but in the meantime, enjoy this higher deduction for your corporation, partnership or self-employment income and be sure to save your receipts!