This is part one of a four-part series that provides mobile workforce guidelines for contractors.
Are you wondering if that golf outing or burger and beer are deductible for your construction company? There are some opportunities and changes for company meal deductions that may reduce the company’s income in the current 2021 tax year, which can provide more advantageous tax results.
For tax years 2021 and 2022, some meals are now considered 100 percent deductible as part of the Consolidated Appropriations Act that was passed on December 27, 2020. As a best practice, we recommend breaking out the below accounts in your Trial Balance to ensure the proper characterization and deductibility on your tax return. It is important to break out these accounts and retain detailed receipts in order to get the best desired tax results and to mitigate risk in the case of an IRS audit. These include:
- Client meals
- Employee meals
- Company events
- Entertainment
This Q&A offers general guidance for the accounting and deductibility of business meals and entertainment accounts.
For expenses that are categorized as client meals, what is the tax deductibility?
Client business meals purchased from a restaurant are temporarily 100 percent deductible for amounts paid after December 31, 2020 and before January 1, 2023. These meals are deductible if business is conducted at the meeting, the taxpayer is present, and the meal is not lavish or extravagant. Businesses that primarily sell pre-packaged food or beverages that are not for immediate consumption (grocery store, specialty food store, liquor store, etc.) are not considered eligible restaurants. So that burger and beer you had with your client at your favorite restaurant is now 100 percent deductible; however, starting in 2023, these meals will be considered 50 percent deductible again.
For expenses that are categorized as employee meals, what is the tax deductibility?
Employee meals include, but are not limited to, meals provided for the convenience of the employer, overtime employee meals, or meals during meetings of employees, stockholders, agents, directors, etc. These are temporarily 100 percent deductible, but some listed above will be non-deductible after 2025.
What is considered a company event for purposes of determining the tax deductibility of these expenses?
Company events are events held by an employer to provide fun for the employees, and they are considered 100 percent deductible for the employer. Some eligible events include holiday parties, picnics, team building events, etc. These events must benefit all employees in order to be 100 percent deductible.
What should be included in an entertainment expense account? What is the tax treatment of these expenses?
Entertainment is still considered non-deductible for tax purposes. Some examples include golf outings, sporting events, hunting, fishing, etc. This also includes food or beverage provided at an entertainment event unless the food and beverage is separately stated on a receipt and provided by a restaurant. In this instance, the food and beverage is temporarily 100 percent deductible through 2022.
As a reminder, always be sure to retain receipts for company records. The IRS may deny the expense if you do not have the proper receipt and documentation. Per IRS guidance, proper documentation includes the name and location of the restaurant, the number of people served, the date and amount of expense, and the business purpose.
Click here for a more detailed chart of meals and entertainment deductions and refer to Notice 2021-25 for further information.
Stay tuned for part two in our series which will cover additional mobile workforce guidelines for contractors. If you have any questions, please contact your Kreischer Miller relationship professional or any member of our Construction Industry Group.
Authors:
Rachel DeFrain, Senior Accountant, Tax Strategies
Tiffany Eichhorn, Senior Accountant, Tax Strategies
Michelle Gray, Senior Accountant, Tax Strategies
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Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.
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