Everything that’s changed for Meals and Entertainment tax deductions from the 2018 Tax Reform Bill
The Tax Cuts and Jobs Act (the “Act”) recently had its first birthday. Whether you see that as a reason to celebrate or an unwelcome reminder, there is little question that the law’s multitude of changes to the tax code has made this tax season more confusing and complicated for a lot of Americans. In many respects, the law itself lacked clarity, creating more questions than answers. Such was the case with the popular and widely used deductions for business-related meals and entertainment expenses.
For years, companies could wine, dine, and generally show clients and customers a good time knowing that they could generally deduct half of those expenses on their taxes. So long as the cost was directly related to the active conduct of the taxpayer’s trade or business or if it preceded or followed “a substantial and bona fide business discussion,” it was deductible.
Tax Deduction for Entertainment Eliminated
Unfortunately, those Cubs tickets, rounds of golf, or sunset cruises on Lake Michigan with clients or prospects can no longer be written off. The Act amended § 274 of the Internal Revenue Code to eliminate the deduction for entertainment, amusement, or recreation expenses altogether.
What about business meal deductions as part of client entertainment?
But what about the hot dog you bought your client at the ballgame, the beers you sprung for at the 19th hole, or the appetizers you paid for on that cruise? The Act was unclear as to whether food and beverage expenses incurred while “entertaining” clients were no longer deductible.
In response, the Internal Revenue Service (IRS) issued guidance on this point in October 2018. While noting that it would eventually publish proposed regulations “clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses,” the IRS stated that companies could rely on its October notice for the treatment of business meals.
You Can Still Deduct Business Meals, Under Certain Conditions
According to that guidance, the cost of food and beverages is still 50 percent deductible when all the following apply:
- The expense is an ordinary and necessary expense under § 162(a) of the Internal Revenue Code paid or incurred during the taxable year in carrying on any trade or business. (The IRS defines an “ordinary” expense as one that is common and accepted in your trade or business, while a “necessary” expense is one that is helpful and appropriate for your trade or business);
- The expense is not lavish or extravagant under the circumstances
- A company employee is present at the furnishing of the food or beverages
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
So, that Wrigley Field hot dog would be deductible if you were at the game with your client and bought it separately from the tickets, but it would not be deductible if it was included in the cost of a suite you rented and not billed separately.
In light of these changes, it is more important than ever that you itemize in detail any expenses you incur when treating your clients and customers to some food and fun.
If you have questions about the tax treatment of entertainment, meals, or other business development expenses, please contact us. We welcome the opportunity to assist you.