For business owners, it’s essential to understand the various tax deductions available and utilize them to keep more of your hard-earned dollars. Tax laws are constantly changing, so it’s crucial to ensure you’re current on which tax deductions you can use to your advantage.
As a quick refresher, tax deductions lower the taxable income of a business. For example, as a business owner, if you earn $150k for consulting work throughout the year, then you are going to pay tax on the full $150k. However, if you have $35k in tax deductions for the year, you can lower your taxable income to $115k and avoid paying taxes on $35k in revenue.
Tax deductions are an essential aspect of running a thriving business and keeping more money on your side of the ledger.
Two deductions that have seen a lot of change over the past few years are the meals and entertainment deductions for business owners. It’s common for businesses to dine and entertain their clients or employees to promote healthy working relationships.Â
Before 2018, meals and entertainment were typically deductible at 50% of the total expense amount, with certain meal expenses qualifying for a 100% deduction of the total expense amount.
On December 22, 2017, that all changed. The Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump, taking effect for the tax year 2018. The TCJA brought massive changes to the tax code, specifically for deductible meals and entertainment expenses.
The passage of the TCJA eliminated the entertainment deductions completely and capped the meal deduction at 50%. Business owners could no longer deduct expenses for taking clients out for a round of golf, the theater, or a football game but were still generally allowed to deduct food and beverage expenses that were ordinary and necessary, incurred while operating their business.
Fast forward to 2021, and the passage of the âConsolidated Appropriations Act, 2021.â
COVID-19 dealt a harsh blow to many industries, especially the food and beverage industry. Many restaurants have permanently closed their doors, and many more are hanging on by a thread.
To boost business spending at restaurants, The Consolidated Appropriations Act contained a special modification to the business meal deduction. This modification allows businesses to deduct 100% of business meal and beverage expenses at restaurants for tax years 2021 and 2022. While this is a reasonably controversial change and considered by many to be an unnecessary benefit for businesses, it is temporary and expires after the tax year 2022. All that said, this is an excellent boost for the restaurant industry as they attempt to get back on solid footing.
Keep in mind some specific rules apply to the deductibility of business meal expenses.
The Internal Revenue Code section 162 states that meals are deductible if they are ordinary and necessary in carrying on any trade or business, and they aren’t lavish or extravagant. Still, I’m going to leave that last part up to you to decide!
The Consolidated Appropriations Act did not contain any changes to the deductibility of entertainment expenses meaning that at least for now, those rounds of golf are not going to create a tax write-off.
The bottom line is this: the total cost of business meals and drinks with a business purpose, provided by a restaurant, is now 100% tax-deductible for years 2021 and 2022. Unfortunately, entertainment is still non-deductible. So even though you might not be able to deduct that round of golf or those tickets to see the Stanley Cup Champions – The Tampa Bay Lighting – dinner at Charley’s, my favorite steakhouse in Tampa, could be a great way to solicit new business or treat your employees or clients.
This is a great way to support local restaurants and the staff who work in these wonderful establishments.
Now that’s a win-win!
If you’re a business owner and would like to discuss this tax deduction and other ways to stop spending so much of your hard-earned money on taxes, get in touch with me for a no-cost consultation.