Hi, I’m Bette Hochberger, CPA, CGMA. There has been some recent news and changes regarding the meal deductions for businesses, so let’s go ahead and jump in and discuss more.
For businesses across the United States, the realm of tax deductions for meals and entertainment has been a rollercoaster over the past few years. Following temporary measures to support the restaurant industry during the COVID-19 pandemic, 2023 marks a return to the pre-pandemic norms set by the Tax Cuts and Jobs Act (TCJA) of 2018.
Background: TCJA and CAA Meal Deduction Adjustments
Before the TCJA, businesses enjoyed the liberty of deducting up to 50% of entertainment and meal expenses, provided these were related to conducting or discussing business.
However, the TCJA brought about a significant shift, eliminating deductions for most forms of entertainment while retaining the 50% deduction for business meals. This change streamlined the focus onto meal expenses specifically tied to business operations.
In response to the COVID-19 pandemic, the Consolidated Appropriations Act (CAA) of 2021 introduced a temporary boost. It allowed businesses to deduct 100% of certain business meal expenses for 2021 and 2022. This provision aimed to provide economic support to the hard-hit restaurant industry, encouraging businesses to dine out more frequently.
The Shift Back to 50% in 2023
As we step into 2023, the rules are reverting to the pre-2021 standards. The majority of business meals are once again subject to a 50% deduction limit. This change signifies a move back to more stringent tax norms, reflective of the easing pandemic conditions and a stabilizing economy.
Implications for Businesses
This adjustment has several implications for businesses:
– Budgeting and Expense Management: Companies need to realign their budgets and expense tracking systems to accommodate the reduced deductibility of meal expenses.
– Record-Keeping: Proper documentation of meal expenses becomes crucial to justify the 50% deduction.
– Strategy Reevaluation: Businesses may need to reassess their client engagement and marketing strategies that involve dining, given the altered tax benefits.
The shift back to a 50% deduction for business meals in 2023 represents a return to a more normalized tax environment. Businesses must adapt their financial practices and strategies to align with these changes. Staying informed and working closely with tax professionals will be essential in navigating this transition effectively, ensuring both compliance and optimal use of available tax benefits.
I hope you learned something new today. As always, stay safe, and I will see you next time.