Business Meals Tax Deduction Updated
Good news from the IRS. Probably shouldn’t start a blog post with an oxy-moron, but… They recently released their guidance on the deductibility of meals – which essentially maintains the business meals tax deduction that small business owners have leveraged in the past to help grow their business – so much to do about nothing over the past 9+ months.
Why was this so exciting?
The Tax Cuts and Jobs Act of 2017 (TC&JA) removed entertainment from available business tax deductions. Because of the way the tax code is written, many talking heads in the tax world felt that meals would/should/could be coupled and defined as entertainment – therefore eliminating the long-standing deduction for business meals. Bookkeepers and in-house accountants were thrown into a tizzy, trying to track every item which involved a granola bar into the a new category – was an employee there, was a client there, was a prospect there, was it on-site, off-site, at a client’s site, was it a business meeting, was it a shareholder meeting, was it during training, was it during regular business hours or outside, and on and on, since the guidance was lacking, people were freaking out.
Our typical approach when fielding these questions was always – if it makes business sense, then do it, don’t let the tax tail wag the money-making machine (that’s a real saying). If buying pizza for your employees for coming in on Saturday to get a project done is the right move, then do it – a potential 30% deduction on 50% of the cost is pretty trivial when measured against happy employees and happy clients.
Now some definitions:
What is “Entertainment”
Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.
Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families.
What is a deductible business “Meal”
Now with the clarification offered by IRS Notice 2018-76, 50% of business meals may still be deducted if you follow these guidelines as outlined in the notice:
- The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Here is an example of a business meals tax deduction that is allowed (straight from the fine folks at the IRS who apparently know many people named “A” & “B”):
Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.
The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
Other considerations:
- You can deduct 50% for meals with employees when business is discussed.
- Common deduction when your spouse is on payroll (and he or she actually does work).
- You can deduct 50% of the costs associated with the meal such as taxes and tips, keeping in check with lavish or extravagant.