Are Meals Deductible By a Business?
Tax Cuts & Jobs Act Changed the Rules: Are Business Meals Non-deductible, 50% Deductible, or 100% Deductible?
Effective January 1, 2018, Internal Revenue Code Sec. 274(a), as modified by the Tax Cuts and Jobs Act (TCJA), disallows any otherwise allowed deduction from income tax for an activity or facility that constitutes entertainment, amusement, or recreation. Sec. 274(k) disallows a deduction for any food or beverages unless: (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or employee of the taxpayer) is present at the furnishing of the food or beverages. Sec. 274(n)(1) limits the deduction for any expense for food or beverages to no more than 50% of the expense that otherwise would be allowable.
The TCJA repealed the exception from Sec. 274(a) that preserved a deduction for business entertainment if it is directly related to or associated with the active conduct of business. This change effectively eliminates business entertainment deductions. Treasury regulations define “entertainment” using an objective standard, including activity “of a type generally considered to constitute entertainment,” such as “entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, [and] sporting events.” Under the regulations, entertainment may include activities that satisfy “personal, living, or family needs” but does not include: (1) supper money an employer provides to an employee working overtime; (2) a hotel room maintained by an employer for lodging of employees while traveling for business; or (3) an automobile used for business, even though it is also used for routine personal purposes, such as commuting to and from work.
IRS Notice 2018-76
The notice clarifies that the TCJA did not change the definition of entertainment under Sec. 274(a)(1) and, therefore, the regulations defining entertainment continue to apply. In addition, the notice states that the TCJA did not address when the provision of food and beverages might constitute entertainment, observing that “the legislative history of the [TCJA] clarifies that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business.”
Under the notice, taxpayers may deduct 50% of an otherwise allowable meal expense if:
1. The expense is an ordinary and necessary expense under Sec. 162(a) that is paid or incurred during the tax year in carrying on a trade or business;
2. The expense is not lavish or extravagant under the circumstances;
3. The taxpayer or the taxpayer’s employee is present at the furnishing of the food or beverages;
4. The food and beverages are provided to current or potential business customers, clients, consultants, or similar business contacts;
5. The food and beverages (for food and beverages provided during or at an entertainment activity) are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the entertainment cost on one or more bills, invoices, or receipts.
To illustrate the appropriate deduction for a food and beverage expense incurred at an entertainment event, the notice provides three examples demonstrating the treatment of business meals in connection with an entertainment activity:
Example 1. Business meals purchased separately from entertainment: Taxpayer A takes B, a business contact, to a baseball game. A purchases the tickets and separately buys hot dogs and drinks for A and B at the game. The notice provides that the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense. Accordingly, A may deduct 50% of the expense for the hot dogs and drinks.
Example 2. Cost for business meals commingled with entertainment, not separately stated or purchased: Taxpayer C takes D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The ticket cost includes the costs of the food and beverages available in the suite, which are not separately stated on the invoice. The notice provides that the full cost is a nondeductible entertainment expense.
Example 3. Business meals separately stated from entertainment: If the invoice for the basketball game tickets separately states the cost of the food and beverages, the separately stated cost of the food and beverages is not an entertainment expense. Accordingly, C may deduct 50% of the food and beverage expense.
Tax Planning Tip – Maintain Separate General Ledger Accounts to Maximize Tax Deductions and Reduce Taxes: Understand the tax rules and recording meal expenses in the correct general ledger account will reduce your tax liability.
Tax Planning Tip – Zero % Tax Deductible: If your invoice shows that meals are not separately stated from the cost of entertainment, the entire invoice price is considered entertainment and is NOT deductible. Other non-deductible examples include:
- Lunch with customer, client or employee without a business purpose/discussion;
- Ticket price for sporting event that you do not attend;
- Club dues; for example, country clubs, golf and athletic clubs;
- Lavish or extravagant entertainment expenses (basically unreasonable expenses);
- Venues which may make business discussions difficult, e.g., night clubs, theaters, vacations, sporting events.
These costs should be recorded as an entertainment expense in your general ledger.
Tax Planning Tip – 50% Tax Deductible: If your invoice separately states the cost of meals and provided that you meet the other requirements discussed above (taxpayer is present and business is conducted), 50% of the invoice price is deductible as a business meal. These costs should be recorded as meal expenses – 50% tax deductible, in your general ledger.
Before the TCJA, the previously allowed 100% deduction for meals provided for the convenience of the employer, overtime meals paid to employees, occasional meals provided to employees, and snacks in the office are not 50% tax deductible.
Tax Planning Tip – 100% Tax Deductible: Some entertainment and business meals are 100% tax deductible and these need to be recorded in a separate general ledger account.
- Transportation costs to and from a business meal or entertainment activity, may be 100 percent deductible depending on the facts;
- Meals provided on the employer’s premises for the employer’s convenience, if more than 50 percent of the employees are furnished meals for the employer’s convenience;
- Promotional activities that are made available to the general public;
- Employer-provided social/recreational expenses primarily for the benefit of employees who are not highly compensated, such as a summer picnic or office holiday party;
- Employee reimbursed meal expenses;
- Cost of meals included in employees’ W-2s
Tax Planning Tip – DOCUMENTATION REQUIRED: Your support documentation (bill, invoice, etc.) needs to reflect date, names (and titles) of participants, business purpose and topics discussed, and amounts.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.