The 2017 Tax Cuts and Jobs Act (TCJA) made significant changes to the business meals and entertainment deduction starting in 2018. On October 3, 2018, the Internal Revenue Service (IRS) issued guidance on the business expense deduction for meals and entertainment as a follow up to the TCJA. This guidance was in response to confusion regarding the clarity of the changes made by the TCJA. We now have a much clearer picture of what is and isn't considered deductible and to what extent.
In a nutshell:
What is 100% Deductible:
Prior to 2018, certain meals were 100% deductible; however, the TCJA has further limited the meals that used to be 100% deductible.
The meals that are still 100% deductible are;
- Meals for employee events such as office holiday parties or company picnics.
- Food and beverages provided at promotional activities for the general public are 100% deductible.
- For example, a stockbroker can deduct 100% of meals provided to potential investors who attend sales presentations.
- Meals treated as taxable compensation to employees are 100% deductible.
- Meals that are reimbursed by your client are generally still 100% deductible. (The client, however, would only be able to deduct 50%).
- Meals provided by restaurants to customers.
What is 50% Deductible:
- Generally, business meals are 50% deductible.
- Meals for employees at employer-provided eating facilities for the convenience of the employer are now 50% deductible.
- Lunch brought in for staff meetings is also now 50% deductible.
- Meals from employee travel.
- For example, if an employee or self-employed individual has to travel for work. Travel does not refer to a typical workday's worth of travel but extended trip out of town.
- Food and beverages that would count as de minimis fringe benefits.
- i.e., so small or infrequent that accounting for them would be impractical.
Note: For meals to be deductible, they cannot be lavish or extravagant and the taxpayer or an employee of the taxpayer must be present at the furnishing of the food and beverages.
What is NOT Deductible:
Club dues (such as for country clubs, athletic clubs, airline clubs, and hotel clubs) are not deductible.
Business entertainment expenses which were 50% deductible are no longer deductible beginning in 2018.
- Items such as concert tickets, sporting event tickets, and golf fees are no longer deductible.
- Also, meals and beverages on the same bill an entertainment event are not deductible.
- For example, use of a company box at a sporting event where the food and beverages are on the same bill as the charge for the company box. Whereas, the charge for the box tickets and the food and beverages are billed separately, the food and beverages are then considered deductible.
Dues for business organizations, professional associations, civic and public service organizations remain deductible unless the primary purpose of the organization is to provide entertainment.
All taxpayers are still required to substantiate the meals expenses, basically defining who, what, when, where and why. To validate meals expenses, keep receipts and records detailing the business purpose, location, date, and who the meal was with, also any additional details. IRC section 274(d) specifies the specific requirements for substantiating deductions.
Bookkeepers and Internal Accountants Take Note:
If you haven't done so already, you will need to set up new accounts to best keep track of these changes. We suggest setting up these new accounts as follows:
- Meals 100% Deductible
- Meals 50% Deductible
- Dues - Nondeductible
Remember these changes are relevant to 2018.
We anticipate that this will be a hot spot for the IRS. So even though 2018 has already come to an end, we are advising all our clients to go through the meals, entertainment and dues expenses on the income statement and split them out by deductibility.