February 23, 2022

Entertainment 100% Nondeductible

Certain narrow exceptions to the 50% limitation allow taxpayers 100% deduction for qualifying food and beverage expense. (Note that the Consolidated Appropriations Act, 2021, P.L 116-260, temporarily (for 2020 and 2021) allows a 100% business expense deduction for meals as long as the expense is for food or beverage provided by a restaurant.)

Food and beverage expenditure is generally still 50%

The requirement for 50%

1. The expense is not lavish or extravagant under the circumstances.
2. The taxpayer, or an employee of the taxpayer, is present at the furnishing of such food or beverage; and
3. The food or beverage are provided to the taxpayer or a business associate.

The exception to the 50% limitation for food and beverage expenses

Expense treated as compensation: Allow 100% deduction for expenditures for food or beverages provided to an employee if the employer treats those expenses as compensation to that employee.

The requirement to apply this exception

1. Compensation to an employee and as wages to the employee for purposes of withholding.
2. As compensation to the employee in the context of fringe benefits. If these provisions are met a full deduction may be allowed, regardless of how the employee may treat the compensation on his or her return (see Regs Sec1.274-12(c)(2)(i)).

Recreation expense for employees: A 100% deduction is allowed for food or beverage expenses incurred by the taxpayer for a recreational, social or similar party such as holiday parties, annual picnics and summer outings.

This exception does not apply to activities that discriminate in favor of highly compensated employees, of others with a 10% or greater interest in the business. However, a 50% deduction may still be available (see Regs. Sec. 1.274-12(c)(2)(iii)).

Items available to the public: A full (100%) deduction (100%) maybe taken for food or beverage expenses to the extent the food or beverages are made available to the general public.