Portland is known around Maine and New England — and even throughout the country — for its award-winning, creative and gourmet restaurants. Unfortunately, many of Portland’s restaurant businesses have struggled mightily during the COVID-19 pandemic. Some have even had to close.
But a little relief may be on the way. In the recent Consolidated Appropriations Act (CAA), which was passed late last year, a provision was included to incentivize spending on business-related food and beverage purchases.
While some critics described the tax break as a benefit for wealthy business executives to enjoy “three martini lunches”, proponents said it can help struggling restaurants. If you’re a local business owner, this new tax provision could be a way for you to save money on business-related meals and help support local Portland restaurants.
Here are some of the details.
Temporary Changes under the CAA
Previously, deductions for business meals at restaurants were limited to only 50% of the cost. Now, the CAA now allows taxpayers to deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022, subject to the considerations identified in preexisting IRS regulations. But until the IRS issues additional guidance on the CAA relief provision, some issues will remain unclear. Do bars that serve food count as restaurants? Presumably they do, but IRS guidance is needed to know for sure.
Preexisting Recent IRS Regulations
While further IRS guidance is needed, we can look back at previous IRS regulations for insights on how this tax deduction may be defined. Issued in October of just last year, the IRS’ final regulations which clarified meal-related deductions under the Tax Cut and Jobs Act could be a good place to look.
Definition of food and beverage costs
Food or beverages means all food and beverage items, regardless of whether they are characterized as meals, snacks or other types of food and beverages. Food or beverage costs mean the full cost of food or beverages, including any delivery fees, tips and sales tax.
Treatment of business meals
Under the October 2020 regulations, no deduction is allowed for business-related food or beverages unless:
- The expense isn’t lavish or extravagant under the circumstances
- The taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverages
- The food or beverages are provided to the taxpayer or a business associate.
A business associate means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business such as a customer, client, supplier, employee, agent, partner or professional advisor.
Treatment of meals while traveling on business
Under the final regs, the long-standing rules for substantiating meal expenses still applies and they can be deductible. The regs also reiterate the long-standing rule that no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual.
For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.
Under the new law, for 2021 and 2022, meals provided by restaurants while traveling on business are 100% deductible, subject to the preceding considerations.
There are several ways that your business can deduct 100% of the cost of meals, other food and beverages, and even entertainment. Contact Filler & Associates if you have questions or want more information.