Tax Reform: Clarification of Meal & Entertainment Deductibility
New Guidelines on the 50% Business Meal Deduction
Remember the days when you could entertain a client and deduct 50% of the cost? All that changed when the Tax Cuts and Jobs Act (TCJA) was passed in 2017. No longer can you deduct the cost of that sports, theater, or event ticket; however, food and beverage purchased at those events remain deductible. Unfortunately, the way the law is written left taxpayers and tax preparers with questions about how and when to take the deduction.
Today, we have additional guidance from the IRS to clarify expenses for business meals.
Taxpayers may continue to deduct 50% of an otherwise allowable meal expense if the following criteria are met:
- The expense must be paid or incurred during the tax year in carrying on your trade or business and is considered an ordinary and necessary expense.
- Under the circumstances, the expense must not be lavish or extravagant.
- You, the business owner, or an employee from your organization must be present at the furnishing of the food or beverages.
- The food and beverages must be provided to current or potential business contacts including your customers, clients, and consultants.
- When it comes to entertainment activities for your business contacts, the food and beverages should be purchased separately from the entertainment or the cost of the food or beverage should be stated separately from the entertainment cost on one or more bills, invoices, or receipts.
With this clarification, there are still things that remain unknown. For example, are all business meal expenses deductible or only some of them? The IRS intends to give more clarity to situations where business meal expenses are nondeductible entertainment expenses and when they are 50% deductible.
For a refresher on the deductibility of business meals and entertainment for customers, prospective customers and staff, check out this chart. It shows the current deductibility limits for office holiday parties, client entertainment, employee travel meals, expenses for attending a business meeting or convention, and reimbursed meals and entertainment expenses.
If you have questions about the deductibility of business meals, please contact your Adams Brown advisor.