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Entertaining During a Pandemic

Arin V., EA , MBA
Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.
One of the biggest changes we have experienced during the last year or so is the transitioning of nearly all entertainment indoors, and more specifically, mostly inside our homes and living spaces. Therefore, with people spending much more time indoors, as well as on Zoom (and other virtual communication tools), the following question seems fair to ask: what are we allowed to deduct in terms of entertaining during a pandemic?

Perhaps it is better to answer this question by painting a portrait of a scenario. Imagine that due to travel limitations and lingering concerns about COVID-19, you decide to hold a company party with your startup employees, fully online on Zoom. During this scenario, you would be able to fully deduct the expenses related to the company party. Further, thanks to the Consolidated Appropriations Act that was signed into law on December 27, 2020, you would be able to deduct 100 percent of food and beverages you purchased from a restaurant, during the years 2021 and 2022. This would be the case even if you had a service such as DoorDash or Postmates deliver the food and beverages. In other words, you do not have to consume the food and beverages directly at the restaurant in order to fully deduct the expenses.  Additionally, if you included meals as compensation to your employees and reported this on their Form W-2, you could deduct 100 percent of these expenses as well.

Let us provide another scenario. Suppose you started a new business this year, and you decided to hold a grand opening or open house to the public in order to promote your new business. In this scenario, you might be surprised to know that you can even deduct 100 percent of the cost of food and drinks provided free of charge to the public. Therefore, those of you who are altruistically inclined can take advantage of this to achieve tax savings while also providing a public good and promoting your business or brand.

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But how about meal and entertainment expenses incurred while meeting with clients? In this scenario, it is important to distinguish between meals and entertainment. The reason for this is that after the Tax Cuts and Jobs Act of 2018, entertaining clients with perks such as concert tickets and tickets to sporting events (in other words, if the activity is considered entertainment, amusement, or recreation), is no longer deductible. If, instead, you decide to meet with a client at a restaurant, and the meeting is business related, you could still deduct 50 percent of these business meals. This remains unchanged from before, and is a welcome deduction, especially after things eventually open up and the world starts to entertain outside the office and home more often.

It is also important to note that one can only deduct food and beverage expenses if the expense is not considered lavish or extravagant and if the taxpayer or employees are available when the food and beverages are provided. However, this is not necessarily related to the dollar amount spent, as it is understandable that the cost of meals and beverages can vary greatly depending on the environment, location, and country.

Therefore, while the world begins to turn the page on the pandemic, and while it will take some time for us to get back to some sense of normalcy in terms of entertaining, for the time being, it is useful to take advantage of all that we can while entertaining during this pandemic. And not just because there are still some tax savings associated with entertaining, but also because it makes sense from a sanity perspective. Indeed, it is even more important these days to take time to unwind and relax, and step away from work every once in a while to enjoy the company of others.

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