Companies can deduct full cost of business meals on 2022 tax returns

All those lunches, ranging from sandwiches to sushi, that companies bought to encourage employees to hop out of their sweats and back into their suits – or at least clean khakis – will no longer be as lucrative a tax break in 2023.

Most employees probably had no idea that tax rules spiced things up in the office last year and the year before.

But companies often could take advantage of a special tax deduction as they regularly bought food for the staff to encourage people to stop working remotely and flow back into the building after pandemic-related precautions unraveled much workplace activity.

A tasty tax break

In 2021 and 2022, companies could deduct the entire cost of many business-related meals and beverages purchased from a restaurant. The same wasn’t true if food was picked up at the supermarket, party store, vending machine, or convenience store. It had to be takeout, delivery, or meals eaten at the restaurant.

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The temporary tax break was far better than the typical 50% deduction for business meals.

To qualify, the IRS noted, payment or billing for the food and beverages had to take place after Dec. 31, 2020, and before Jan. 1, 2023.

The Taxpayer Certainty and Disaster Relief Act of 2020 temporarily boosted the business deduction for food and beverages to 100% those two years. The deduction slips back to 50% in 2023.

Among other rules, the business owner or an employee of the business had to be present when food or beverages were provided. As usual, no deduction would be allowed if meal expenses could be viewed as “lavish or extravagant,” according to the Internal Revenue Service guidance.

Won't work for cafeteria food

It's a quirky tax break that some small business owners might overlook since the deduction only applies for two years – 2021 and 2022. Small business owners need the correct paperwork to back it up too.

"You have to separate restaurant meals from other food expenditures, such as an in-house cafeteria or grocery stores," said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Small businesses, he said, might not have kept adequate records to treat restaurant meals differently from other food sources. But if they have the records, they could be looking at a tax break.

As many work on 2022 tax returns, the meals deduction tax break can become confusing, Luscombe added. Entertainment expenses are no longer deductible since the Tax Cuts and Jobs Act in 2017, while meal expenses are .

"When the client is taken to an entertainment event that includes a meal, it must be possible to separate the cost of the meal from the cost of the entertainment," Luscombe said. If not, the meal included as part of the entertainment is not deductible.

The IRS also notes that the cost of the meal can include taxes and tips. But the cost of transportation to and from the meal isn't part of the cost of a business meal and can't be calculated as part of the deduction.

How one local restaurant owner sees it

Blake George, a partner at the restaurants Adachi and Zao Jun New Asian in the communities of Birmingham and Bloomfield Township, Michigan, said many companies in the area – including medical offices, pharmaceutical companies, auto dealerships and others – made large takeout orders, particularly from Zao Jun, to entice people to come back into the office after working from home during the pandemic.

Companies might spend $100 for a small staff and up to $3,000 to cover up to 200 people dining on dishes like Mongolian beef and sushi.

He attributes some of that volume to the fact business owners knew they could write off 100% of the meal expenses .

“When that goes to 50%,” he said, “it might make them think twice.”

Many business owners, of course, remain fearful that we could face a sluggish economy in 2023, including the possibility of a recession down the line. Meals for employees and other perks could be the first to go – regardless of the tax rules.

George remains optimistic, though, that many companies still will want to provide food to keep their employees engaged and happy, especially since it is harder to hire in a tight labor market.

Employees have a chance to talk with one another and collaborate over a meal, he said. It’s not always a tax play but more of an incentive for employees to work for a particular company, instead of leaving to work somewhere else.

“They’re building friendships and they’re building a network,'' George said. "They’re not just sitting at home and talking to someone on Zoom that they never really interacted with or know anything about.”

And the return to the old tax break isn’t horrible.

“Fifty percent is 50%,'' George said. "It’s not like it’s zero.”

Other deductions stick to 100%

The reason that meals are a 50% deduction, Luscombe suggested, is that Congress reasoned that if you take a client to lunch, the client’s meal should be deductible but not your own meal.

"So they came up with the normal 50% limit on business meal deductions," Luscombe said.

Now that restaurants aren't dealing with shutdowns or slow sales triggered by the pandemic, less of an incentive may be needed to build restaurant traffic.

And many business deductions – including money spent on raw materials for products or services, employee wages and benefits, insurance, advertising and shipping – continue to be 100% deductible.

"When you think about business deductions, a 100% deduction is a very common thing," Luscombe said.

Even the purchase of capital equipment, Luscombe said, has been 100% deductible since the Tax Cuts and Jobs Act of 2017.

One exception, Luscombe said, applies to research and development expenses.  They had been 100% deductible at one point but that deduction expired in 2021. Now, such expenses must be deducted over five years.

Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on USA TODAY: Tax Season 2023: Companies can deduct full cost of 2022 business meals