When the Tax Cuts and Jobs Act was passed in 2017, there were significant changes to the tax code for companies. Some of the changes were helpful, and some hurt businesses. For example, the QBI tax deduction helps significantly, which allows businesses to deduct 20% of their qualified income. On the other hand, the Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses and reduced the deductible amount for business meals to only 50%.
The latest emergency coronavirus relief package, The Consolidated Appropriations Act of 2020, reversed some of the changes the Tax Cuts and Jobs Act put into place. One of the main changes that will help small businesses is business meals incurred after 12/31/2020 and before January 1, 2023, are now 100% tax-deductible!
The change is only temporary for now and will last for two years so make sure that you take advantage of this change while you can.
While deducting business meals, make sure to keep track of the amount, who you were with, and what the business meal was for.
It should be noted that there are some rules in deducting business meals. To be deductible :
- The expense is ordinary and necessary (IRC Sec. 162(a))
- The food and beverages can’t be lavish or extravagant under the circumstances.
- You or one of your employees must be present when the food or beverages are served.
- The food or beverages must be provided to you or to a “business associate.” This is defined as a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business.
Many businesses took a hit when the rules for Meals and Entertainment deductions changed in 2017. While the new legislation does not restore the deduction for entertainment expenses, it does allow taxpayers to temporarily recoup tax benefits related to some meal expenses by allowing a 100% deduction for expenses that occur in 2021 and 2022.
If your business has historically benefited from meals and entertainment deductions, or if you think you have potentially eligible deductions now, it is best to work with a knowledgeable tax advisor.
If you have any questions, PCS is always happy to help. Schedule an appointment to speak with one of our experts