Appetite for Deductions: CAA and Meals & Entertainment

Appetite for Deductions:  Welcome to the Jungle of the Consolidated Appropriations Act (CAA) and Meals & Entertainment

In these extraordinary times, the business community’s need for financial aid in the form of grants, loans, and tax deductions/credits, has never been greater.

To help meet the urgent need for COVID-19 relief, President Donald Trump signed the $2.3 trillion Consolidated Appropriations Act, 2021 (CAA) into law. This Act included the deductibility of PPP Loan expenses, provisions for PPP Round 2, and several other non-COVID-19 related updates, including a pleasant change to the deduction businesses can take on business meals for tax purposes.

Herbein previously published a blog on November 4, 2020 providing the background and deductibility of meals and entertainment expenses by businesses prior to the CAA. The key takeaway: meals purchased for a business purpose were only tax deductible by 50%, and entertainment expenditures were non-deductible.

Following is a summary of the change to meal deductibility included in the CAA.
Effective for tax years beginning after December 31, 2020 and before January 1, 2023, the full costs of meals provided by a restaurant, that have a business purpose, are now 100% tax deductible. Unfortunately, entertainment is still non-deductible.

There are a few key issues in the previous statements:

  • The specific use of the word “by,” means that meals do not have to be consumed in the restaurants.
  • Delivery or take out of meals from a restaurant still result in the full 100% deduction.
  • The term “restaurant” is not clearly defined by the Act, so hopefully more guidance on that will be forthcoming.  
  • Internal Revenue Code (IRC) section 274 regulations allow taxpayers to include delivery costs, tips, and sales tax in the full meals’ costs.
  • “Business purpose” refers to IRC section 162 which states that a tax deduction is allowed if it is “ordinary and necessary... in carrying on any trade or business.” Section 162 also states that it cannot be “lavish or extravagant.”

Now meals can be 100% tax deductible when dining with prospective customers/clients, employees, partners and other professionals where business is being conducted. This could be a very beneficial tool to help solicit new business, treating employees, and supporting local restaurants.

Tickets purchased to take a client or an employee to see Guns ‘N’ Roses in concert is considered entertainment and, therefore, not a deductible expense for tax purposes.

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Article contributed by John (JP) Hazel, CPA.