November 15, 2022
The temporary 100 percent business meal deduction expires on December 31, 2022. The incentive allows business taxpayers to completely deduct the full cost of business-related meal and beverage purchases made in a restaurant. The deduction is especially beneficial to law firms that rely on these interactions for business development and networking activities. Starting on January 1, 2023, the eligible deduction amount will revert to 50%. For this reason, it is important to take advantage of the tax savings opportunity before it is lost. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.
Keeping track of the business meal deduction in tax law can be confusing, depending on the year. Throughout its long history, this particular tax incentive has gone through 100%, 80%, 50%, and 100% in 2021 and 2022. When the deduction was limited to 50 percent in the Tax Cuts and Jobs Act (TCJA), it was also separated from the entertainment deduction. Until then, law firms and other businesses were allowed to treat client entertainment and meals interchangeably as far as tax treatment went.
The Consolidated Appropriations Act (CAA), which became law at the end of 2020, expanded the business meals deduction from 50 to 100 percent to help boost restaurant sales, which were reeling from the pandemic.
As a result, businesses have been able to deduct the full cost of eligible food and beverage purchases in 2021 and 2022. In 2023, the deduction reverts to 50%. While it’s available, the 100 percent deduction is a simple but effective way to manage taxes as the year winds down.
Law firms can use the expanded meal deduction in several ways.
*The catch here is that the food and beverage purchases must be separate from the cost of attending the event, performance, or outing. To qualify, firms must keep separate receipts, invoices, or bills. Entertainment expenses were allowed a 50% deduction under previous tax law, but that expired with TCJA.
Eligible restaurants must prepare food for immediate consumption, and the meal can be on-site or catered at the office or another location. Caterers qualify.
Prepackaged meals and items in grocery, convenience, liquor stores, and vending machines do not. A restaurant on the firm’s premises that provides meals to employees that aren’t included in the employee’s gross income or an employer-operated facility is ineligible for the 100% deduction. The latter remains ineligible even if a third party operates it – in the case of an on-site cafeteria for employees, for example.
Food and beverages purchased at those facilities qualify for the lower 50% deduction.
In practice, food and beverages for a client event may be deducted separately. For example, catering for a business networking event at the firm’s office would be 100 percent deductible. But if the firm purchased wine for the event separately at a liquor store, it would only be subject to the 50% deduction.
The same example would apply if the partners provided lunch to employees from a local restaurant or pizza shop and purchased soda and other drinks separately from a drug store or grocery store. Snacks and drinks purchased for general consumption around the office would qualify for the reduced deduction as well.
Tickets to concerts or sporting events are not deductible at all, however.
If food and beverages are included in employee W-2 compensation or provided to at least half of all employees, the expenses are 100 percent deductible. Simply providing dinner to employees who work overtime is a nice perk, but unless it’s included in the employee’s taxable wages, It’s not fully deductible.
Overall, if a law firm partner, shareholder, or employee is present and the meal is deemed a reasonable expense – as in, not overly lavish for the circumstances – chances are, it can qualify for the tax deduction. The purpose of the meeting must be directly connected to the firm.
Employee food and beverage expenses while traveling for work – either to a client or a conference, for example – fall under per diem rules. New per diem rates took effect on October 1, 2022.
Per diem reimburses employees for business travel at a flat rate per day, depending on where the travel or lodging is. Certain parts of the U.S. fall under a higher per diem rate than others; Jekyll Island and Brunswick will have a higher per diem rate between March 1 and July 31, but Atlanta would be subject to standard rates year-round, for example.
Under the high-low method described above, the per diem rate for high-cost localities is $297 per day and $204 for all other areas. For meals and incidental expenses only, the high-low rates are $74 and $64, respectively.
The firm may choose different reimbursement amounts for per diem rates, but they may not be less than the federal per diem for that area. Note that even if per diem rates are used, and employees aren’t required to substantiate exact costs, the purpose of the trip, time, and place must still be recorded.
Law firms must keep original receipts for each expense, documented with the purpose of the meal, the date, and who was present. Even if a business meal is 100% deductible, that deduction does not cover spouses or friends. In those cases, the receipt, invoice, or bill must separate deductible and non-deductible expenses.
In bookkeeping, law firms must ensure that food, beverage, and entertainment expenses are recorded separately according to what’s fully or partially deductible.
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The opportunity to take a 100% deduction for eligible meal expenses is quickly coming to an end. Law firms should pay careful attention to take advantage of this tax savings opportunity. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.