2020 was a rough year for small businesses. Perhaps, none hit harder than restaurants. Thankfully, help is on the way from other small businesses, and strangely... congress! With families across the country struggling from the COVID-19 pandemic, congress passed the Consolidated Appropriations Act to send $600 stimulus checks to Americans in an attempt to help blunt the economic impact. This law did much more than just cut checks, it included a provision specifically intended to help one of the nation's hardest-hit industries, restaurants. It did this while simultaneously helping out small business owners.
A Tax Deduction History Lesson
If you are a small business owner, then you are probably familiar with the "Meals and Entertainment" deduction. Even though this has changed over recent years, like no more deductions for the "Entertainment" part of “Meals and Entertainment” (like ball games and golf outings), it still allowed small business owners to take a deduction of 50% of the money spent on most business meals. So, for instance, when you take a client out for a lunch that costs $50 between the two of you, you can write off $25 (50%) at tax time. Of course, specific rules always apply. For example, you or your employee must be present at the meal's consumption. Also, the meal cannot be considered lavish or extravagant. While it was great that you could take a benefit for treating a client to dinner, it just got even better!
Tax Deduction Increases!
In an effort to help promote the consumption of meals from hard-hit restaurants, the "Meals" deduction increased to 100% for qualifying business meals between January 1st, 2021 and December 31st, 2022 only! Now these meals, when purchased from restaurants, can be completely deducted from your business income tax return. Remember that there are still rules!
Tax Deductions Have Rules, Always!
Any tax deduction is going to be subject to rules, regulations, stipulations, and requirements. As mentioned above, these meals must be from "restaurants". Let's define that.
What is a Restaurant?
A restaurant is described in IRS Notice 2021-25 as:
"a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises."
A "restaurant" does not include:
"a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk."
Document Your Meals
Now that we've already phoned half of our clients in an effort to get some delicious food and take some stress off our income tax bill, we still need to do it the right way. Make sure you have a plan in place.
Here is an important question: "What records should I keep?" Documenting your expenses is crucially important. If you don't have a record-keeping system in place for your small business, you should get one yesterday. If you need help, you can and should reach out to a trusted advisor, like us! Each time you enjoy a business-related meal with a customer you should save the receipt. It's also very helpful to make a note about who was present at the meal and what the business purpose was for that meal (i.e. sales meeting, contract review, checking in on a project, etc.). These items can go a long way in substantiating your tax deductions when it's time to file your income tax return.
Maximize It, But Don't Overdo It!
Make sure that whenever you are spending money on your business, it's in keeping with your long-term objectives. If you generally take out current or prospective clients and it fits with your business goals, then by all means order that appetizer! However, you may want to avoid spending unnecessary cash on going out to eat. Remember, an income tax deduction is not the same as a dollar-for-dollar reduction in business taxes. It's a reduction in your companies overall net income.
Wrapping Up (No Pun Intended)
You should make the most out of these limited-time offers from Uncle Sam. With these tax deduction increases, you can not only improve your customer relationships but also save a few of those hard-earned dollars at tax time. Either way, make sure you contact a trusted professional who can help implement this and other tax-saving strategies for your small business.
Disclaimer: This article is educational content and not intended to be used as financial, legal, or tax advice or to replace such advice. The views expressed here are not necessarily the views of Everett Consulting Services, LLC. Please seek out and receive services from a qualified professional before making any financial decisions.