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.
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;
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.
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.
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.
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:
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.