Deductions for Meal and Entertainment Expenses under TCJA

Blog
March 13, 2019

The Internal Revenue Service (IRS) issued a notice clarifying the tax treatment of meal and entertainment expenses associated with operating a business. The meal and entertainment expense deduction changed significantly with the passage of amendment §274 to the Internal Revenue Code made by the Tax Cuts and Jobs Act (TCJA). According to the IRS, the amendment denies deductions for expenses for business entertainment but does not address the deductibility for business meals. The IRS guidance aims to clear up the confusion that this omission has created among the business community. Below is a breakdown of what IRS says taxpayers can rely on, regarding the treatment of business-related meal and entertainment expenses, until regulations are proposed and enacted.

ENTERTAINMENT:

Previously, 50% of business meals and entertainment expenses were deductible. However, under the new tax law, most business entertainment expenses incurred subsequent to December 31, 2017 will be considered 100% nondeductible, with the exception of expenses incurred for the benefit of the taxpayer’s employees (e.g. office holiday parties), which remain 100% deductible.

Below are examples specified by the IRS of non-deductible entertainment expense under the TCJA:

  • Night clubs
  • Cocktail lounges
  • Theaters
  • Country clubs
  • Golf and athletic clubs
  • Sporting events
  • Hunting/fishing
  • Vacations and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family

While several types of entertainment will no longer be deductible, a number of activities will not be affected by the code. As of now, if an employee is working overtime and the employer provides dinner money, that expense will be allowed to be deducted. If a hotel is maintained by an employer while an employee is staying there for business travel, there will not be any limits for the deduction. Finally, cars used for trade or business even if they are used for personal purposes like going to and from work.

MEALS:
Business meals occasionally provided to employees and for the convenience of employers are no longer fully deductible and subject to the 50% deductibility limitation under §274 for tax years 2018-2025. After 2025, such business meals will be treated as non-deductible.

Several requirements are in order to claim a business meal deduction. The meal must have happened during the taxable year for trade or business and cannot be extravagant for the event. The taxpayer or employee of the taxpayer has to be present. If the taxpayer only gives money to a client but is not actually there, that money will not count towards the deduction. The client must either be a current client or a potential client – a previous client that the taxpayer remained friends with will not be allowed. If food and beverage are part of an entertainment activity, proof that the food and beverage were purchased separately from the cost of the entertainment activity is required. For example, at a basketball game, the taxpayer might buy a ticket that automatically provides a meal item of the buyer’s choice. The meal item comes guaranteed with the purchase of the entertainment activity and would not be allowed to be deducted. However, if the ticket only guaranteed entrance and seating, while food is bought separately for the business contact, then the food is allowed to be deducted.

Examples:

Holiday picnic or Christmas party 100% deductible
Food available to the public for free 100% deductible
Food included as taxable compensation to the employee or independent contractor and included on the W-2 or Form 1099 100% deductible
Meals expenses that are sold to a client or customer 100% deductible
Meals for business meetings of employees, stockholders, agents, and directors 50% deductible

 

Any meals during business travel 50% deductible
Meals at a convention, seminar, or any type of meeting, even if the meals cost is not separately stated from the cost of the event 50% deductible
Meals related to business, such as clients, customers, and vendors, provided that there is a business purpose or some benefit to the business 50% deductible
Meals provided on the employer’s premise to more than half of the employees for the convenience of the employer, and meals provided occasionally to employees to enable them to work late, work weekends, or otherwise work overtime 50% deductible
Office snacks (coffee, soft drinks, bottled water, donuts, and similar snacks or beverages) provided to employees on the business premises 50% deductible

 

Meals provided as part of a package involving a charitable sports ticket 50% deductible

For more information, contact a member of our Construction and Real Estate Group at 301.231.6200.