Back in January, we warned you about a seismic change in business deductions for entertaining your clients and potential customers. Later, in May, we dug a little deeper and learned that key tax-writers in Congress had not intended to make such drastic changes and that they were looking for a way to address the business meals portion of the tax law. And now, they’ve made the clarification that we were hoping for that will affect your business this year and in the years to come. Here, below, is the good news.
IRS Clarifies Deductibility of Business Meals
The Tax Cuts and Jobs Act (“TCJA”), which is effective for tax years beginning in 2018, disallows tax deductions for entertainment, amusement, or recreation expenses. However, in a recent Notice, the IRS clarified that taxpayers generally may continue to deduct 50% of food and beverage expenses associated with their trade or business.
This is a HUGE clarification. The clarification notice indicates that the cost of business meals will be 50% deductible if:
(1) the expenses are ordinary and necessary (*) under IRC Code Sec. 162;
(2) the expenses are not lavish or extravagant;
(3) the taxpayer, or an employee of the taxpayer, is present when food or beverages are provided;
(4) food or beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
(5) food or beverages are purchased separately from entertainment (or stated separately on one or more bills, invoices, or receipts).
Taxpayers may rely on this guidance until proposed regulations are published by the IRS.
Meals and beverages, as discussed above, continue to be deductible at 50% of their ordinary, necessary, and un-extravagant cost. Tickets to sporting & entertainment venues continue to be non-deductible as a result of the TCJA. Non-deductible entertainment expenses include:
(1) Costs associated with golf, skiing, or other recreational activities;
(2) Tickets to sporting or theatrical events; or
(3) Tickets to entertainment venues (Disney World, for example)
We advised you back in January to revise your chart of accounts to include an expense item labeled “meals subject to 50% allowance”. This will ensure that your deductible meals expenses are segregated from the non-deductible entertainment costs. Make sure to affect that chart of account change and be diligent in accounting for business meals as opposed to entertainment expenses so that your tax preparation can be more organized and you can realize the tax deductions that you’re entitled to.
As always, let us know if you have any questions.
(*) – To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.