One of the most constant tax rules for many years – the meals and entertainment deduction – has seen some major shake ups in the last couple of years. As tax preparers and business owners, I think we all finally feel good about getting caught up with the changed rules that were part of the Tax Cuts and Jobs Act (TCJA), which was the major tax reform bill that came our way in 2018. The main change and record keeping impact came in the form of making entertainment completely nondeductible expenses, while leaving most meals at 50%. This means we now need to track these items separately, either with a separate account on the P&L statement or when your tax preparer asks you to review the account details come March.
Don't get too comfortable though, because now there is temporarily a new wrinkle to add in. Due to our favorite buzzword of the past 18 months, a new exception was enacted as part of the December relief bill to cut businesses a bit of a break as they work through everything else going on. This creates an exception to the "50% deductible" rule for meals in a specific circumstance - when those meals are provided by a restaurant. If the exception is met, and all the normal requirements are met such as for a business purpose and are not extravagant, then 100% of those meals and beverages will be deductible for tax purposes.
The impact of this new exception will vary by business, certainly. Some may not see a large impact because they do not often travel or woo potential customers over a nice meal. Others will see an extra few thousand dollars come through as a tax deduction for the next two years. Hopefully, this will also serve as motivation for more businesses to reach out to their local restaurants and favorite haunts to either provide meals for takeout or even take their employees out to lunch for their weekly or monthly check in.
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