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When the Tax Cuts and Jobs Act (TCJA) was passed in December of 2017, one of the provisions was to generally disallow a deduction for business expenses relating to entertainment, amusement, or recreation. The TCJA did not specifically mention business meals, and the business community has been eagerly awaiting further guidance.
Although we are still waiting for official IRS regulations regarding this topic, the IRS just released transitional guidance. Until the proposed (and still unreleased) regulations become effective, we can rely on this new guidance. It doesn’t address every detail, but it does let us know that business meals can still be 50% deductible.
Unchanged by the TCJA, an expense is only deductible as a business expense if it is an ordinary and necessary expense incurred in carrying on any trade or business. When it came to meals, the law was already very clear that there had to be a legitimate business discussion taking place and that the taxpayer or an employee of the taxpayer had to be present at the meal. The other participants in the meal could be a current or potential customer, client, consultant, or similar business contact. If these qualifications were met, and proper documentation was maintained, the meal was 50% deductible. We now know that we can continue to treat these meals as we have in the past, as long as they aren’t “lavish or extravagant under the circumstances.”
Entertainment expenses are still not deductible. This includes things like sports tickets, luxury suites at sporting events, concert tickets, golf, or nightclubs. These used to be 50% deductible if they were “directly related” to the active conduct of business or if a bona fide business discussion took place immediately before, after, or during the entertainment. They are no longer deductible at all.
One of the big questions asked after the TCJA was about food at an entertainment event. If a company rents a luxury suite at a baseball game, invites customers and business contacts, and discusses business during the event, would the food served during the game still be deductible? The answer is yes, as long as the food is paid for separately. That means the cost of the food must be detailed on the invoice or be billed separately. If the food is simply included in the ticket price, it is not deductible.
Before the TCJA, an employer could deduct 100% of meals provided for the employer’s convenience. This for situations in which the employees had to be available even during the mealtime (like a doctor at a hospital). These meals are now only 50% deductible and won’t be deductible at all after 2025.
If an employer provides meals to employees working overtime, or during a staff meeting, they can still be 100% deductible as long as they are de minimis. Companies who order bagels and donuts for the morning staff meeting or pizza for the employees working through the dinner hour can take a full deduction. Additionally, a full 100% deduction can be taken for meals provided as part of a recreational or social activity for the benefit of the employees, such as the annual holiday party or summer picnic.
Because there are so many different deduction limits, a company needs to have very good records. It is important to segregate entertainment expenses from meals in the general ledger. It is also important to segregate 100% deductible meals from 50% deductible meals. Co-mingling these expenses makes it impossible to know the proper tax treatment. A company can avoid additional accounting fees by separating these before giving the books and records to its accountant at the end of the year.
Additionally, companies can make sure they structure certain meetings and events to take advantage of the rules that allow the maximum deduction.
For guidance applicable to your individual situation, request an appointment with a tax advisor before the end of the year. Contact us →
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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