If you have already filed your freelance taxes for 2020, you may have noticed that your deductions for meal expenses were considerably lower than in past years. While this is probably in part because you had fewer business meals due to the COVID-19 pandemic, it is also attributable to some major changes in entertainment and meal expense deductions brought about by the Tax Cuts and Jobs Act (TCJA) — which were only finalized in the last few months of 2020.
However, under the COVID-19 relief package passed at the end of December 2020, there are important modifications to eligible business meal expenses which may benefit your freelance tax situation for the next two years. Beginning Jan. 1, 2021 through Dec. 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is considered reasonable.
The 100% business meal deduction is designed to help restaurants affected by the pandemic. Under this temporary tax deduction provision, restaurants are defined as “businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption” by the IRS. This means that if you are buying a business meal from a grocery store or convenience store, it is not eligible under these rules. In addition, this provision does not allow certain employer-operated eating facilities (such as an office cafeteria) to be classified as restaurants.
To fully deduct business-related restaurant meals, be sure to keep your receipts. To write off the full amount of your eligible restaurant meals next tax season, you must substantiate the expense with a receipt and also document when, where, why, and with whom you shared the meal. Your meals must meet the requirements laid out in the related IRS guidance when it comes to who you share the meal with. It must be: “a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business, such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”
As far as record-keeping goes, keep your restaurant receipts in order so you have the documentation needed to reduce your tax bill as much as possible. Once 2022 is over, unless the 100% deductibility guidance is extended, the rules put in place under the TCJA will come back into play. That guidance applies for expenses incurred after December 31, 2017, and, under the TCJA, if they are incurred and paid after Dec. 31, 2025, they will not be deductible at all.
While many times you do not have to keep a receipt for an expense of $75 or less, the IRS can demand to see all receipts. To be on the safe side, keep those restaurant receipts close by for at least three years (the IRS Period of Limitations). In general, you need to keep your tax records for three years from the date the associated return was filed, or from the due date of the tax return (whichever is later).
It is a good practice to scan your restaurant receipts (even small ones) for safekeeping and also record the purpose of the expense, what business topic you discussed over the meal, and who you were with. There are apps that can help you capture these and other expenses so that when it comes time to file your taxes, you can easily add up and track all of your deductible expenses, thereby mitigating your tax obligations as much as possible.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting and business articles for freelancers on his website, www.cpaforfreelancers.com, which also features a blog and a comprehensive freelance tax guide. Please note, due to the high volume of inquiries in regard to COVID-19, Jonathan is not able to respond to individual requests for information at this time.