Business meal deductions: The current rules amid proposed changes
Restaurants and entertainment venues have been hard hit by the
novel coronavirus (COVID-19) pandemic. One of the tax breaks that President
Trump has proposed to help them is an increase in the amount that can be
deducted for business meals and entertainment.
It’s unclear whether Congress would go along with enhanced
business meal and entertainment deductions. But in the meantime, let’s review
the current rules.
Before the pandemic hit, many businesses spent money “wining and
dining” current or potential customers, vendors and employees. The rules for
deducting these expenses changed under the Tax Cuts and Jobs Act (TCJA), but
you can still claim some valuable write-offs. And keep in mind that deductions
are available for business meal takeout and delivery.
One of the biggest changes is that you can no longer deduct most
business-related entertainment expenses. Beginning in 2018, the TCJA disallows
deductions for entertainment expenses, including those for sports events,
theater productions, golf outings and fishing trips.
50% meal deductions
Currently, you can deduct 50% of the cost of food and beverages
for meals conducted with business associates. However, you need to follow three
basic rules in order to prove that your expenses are business related:
- The expenses must be “ordinary and necessary” in
carrying on your business. This
means your food and beverage costs are customary and appropriate. They
shouldn’t be lavish or extravagant. - The expenses must be directly related or associated
with your business.
This means that you expect to receive a concrete business benefit from
them. The principal purpose for the meal must be business. You can’t go
out with a group of friends for the evening, discuss business with one of
them for a few minutes, and then write off the check. - You must be able to substantiate the expenses. There are requirements for proving that meal and
beverage expenses qualify for a deduction. You must be able to establish
the amount spent, the date and place where the meals took place, the
business purpose and the business relationship of the people involved.
It’s a good idea to set up detailed recordkeeping procedures to
keep track of business meal costs. That way, you can prove them and the
business connection in the event of an IRS audit.
Other considerations
What if you spend money on food and beverages at an
entertainment event? The IRS has clarified that taxpayers can still deduct 50%
of food and drink expenses incurred at entertainment events, but only if
business was conducted during the event or shortly before or after. The
food-and-drink expenses should also be “stated separately from the cost of the
entertainment on one or more bills, invoices or receipts,” according to the
guidance.
Another related tax law change involves meals provided to
employees on the business premises. Before the TCJA, these meals provided to an
employee for the convenience of the employer were 100% deductible by the
employer. Beginning in 2018, meals provided for the convenience of an employer
in an on-premises cafeteria or elsewhere on the business property are only 50%
deductible. After 2025, these meals won’t be deductible at all.
Plan ahead
As you can see, the treatment of meal and entertainment expenses
became more complicated after the TCJA. It’s possible the deductions could
increase substantially under a new stimulus law, if Congress passes one. We’ll
keep you updated. In the meantime, we can answer any questions you may have
concerning business meal and entertainment deductions.
© 2020
