Deductibility of Meals and Entertainment

Making sure you get credit for all your deductions is essential when you are running a business. The IRS issued new guidance regarding the deductibility of meals and entertainment expenses in October 2018. The new guidance indicates that taxpayers are still allowed to deduct half of their food and beverage expenses related to operating their business or trade, despite the changes made to meal and entertainment deduction under Section 274, which was created by the tax law referred to as Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

The IRS reports that the amendments to the law deny deductions that are specifically for expenses related to entertainment, recreation, or amusement, but they don’t address any deductions as they pertain business meal costs. Because of the omission, there has been confusion among those in the business world, who aren’t sure if they can still claim deductions for business meals.

Interim guidance released by the IRS indicates that taxpayers can deduct up to 50 percent of a business meal that would otherwise be allowed as long as it is – “an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business”; isn’t a lavish expense’ the taxpayer or their employee is present at the time food and beverages are served; the food and drinks are supplied to a current or potential consultant, client, customer, or similar business contact; and is for drinks and food provided during or an entertainment activity and are bough separate from the entertainment expenses, and the beverage and food costs are stated separately from the entertainment expense on any bills or receipts.

How The Law Changed

As a business owner, you understand that dining and entertaining potential employees, potential clients, clients, and vendors, are successful approaches for building strong business relationships. These are an expense essential for your business to grow and run effectively, but tax reform has made changes in related tax benefits. Every business owner now knows this tax law change, passed at the end of 2017, and how it will affect them and their tax filings.

Under the old laws, you could deduct 50 percent of meals and entertainment expenses unless there was a specific exception that made them 100 percent deductible. The IRS clarifies that meals consist of food and beverages and that entertainment is anything of entertainment, recreational, or amusement value. Most business-related entertainment expenses no longer qualify for deductions under the new tax laws.

There are nine exceptions to the inability to claim business entertainment expenses as deductions. Here are those exceptions:

• Food and beverages for employees if there is a business purpose.
• Entertaining employees is fully deductible because costs are treated as compensation.
• Expenses not viewed as compensation and that are reimbursed by customers are fully deductible.
• Recreational expenses for employees, including company outings and facilities maintained by the business, are allowable.
• Bona fide business meetings that involve shareholders or employees are still fully deductible.
• A qualified 501c(6) non-profit that has a business league meeting that isn’t a social gathering, deductions for their meetings can be claimed.
• Any beverages or food given to the general public are fully tax-deductible.
• If entertainment is bought so it can be sold to customers, then it is deductible and not subject to the limitations.
• Expenses included in the income of those who aren’t employees, such as contractors or freelancers, can be deducted.

Talk With A Business Accountant

If you are still unsure about what you can claim as deductions for your business, consult with an accounting firm that will ensure you get the maximum deductions. Call MKS&H CPAs and Business Consultants to get your business taxes on track. We have two convenient locations to serve you. You can call the Hunt Valley location at (410) 296-6200 or the Frederick location at (301) 662-7913.