Restoration of the Tax Deduction for Business MealsSubmitted by Desmond Wealth Management, Inc. on October 14th, 2018
The Tax Cuts and Jobs Act of 2017 removed entertainment from available business tax deductions, but did not address deductibility of expenses for business meals. To clarify the confusion that arose in the business community due to this omission, the IRS recently released interim guidance that taxpayers can rely on until they issue proposed regulations.
Small business owners have leveraged the business meals deduction in the past to help grow their business. Now with the explanation offered by IRS Notice 2018-76, 50% of the cost of business meals associated with operating their trade or business may still be deducted, as long as it follows these specific guidelines the IRS outlined in the notice:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
The notice contains three examples of allowable business meal tax deductions, using sporting events to illustrate how they intend to interpret these rules. The examples follow the AICPA's recommendation that meal expenses be deductible when their costs are separately stated from the cost of the entertainment:
Example 1: Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.
- The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and thus, the cost of the game tickets is an entertainment expense and is not deductible by A.
- The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance.
- Therefore, A may deduct 50% of the expense of the meal of hot dogs and drinks purchased at the game.
Example 2: Taxpayer C invited D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.
- The basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and thus, the cost of the game tickets is an entertainment expense and is not deductible by C.
- The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the § 274(a)(1) disallowance.
- Therefore, C may not deduct any of the expenses of the cost of meals included with the basketball game.
Example 3: Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.
- As in Example 2, the basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C.
- However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance.
- Therefore, C may deduct 50% of the expenses associated with the food and beverages provided at the game.
Business meal deductions have now been restored. Just make sure you disconnect the meal from the entertainment – and don't boost the meal bill to reduce the entertainment bill just to be able to deduct it.
Other considerations that are commonly forgotten:
- You can deduct 50% for meals with employees when business is discussed. (A common deduction is when you add your spouse on payroll - and he or she actually does work.)
- You can deduct 50% of the costs associated with the meal such as taxes and tips, keeping in check with "lavish or extravagant."
The IRS will be updating Section 274 to reflect the interpretations above, and are requesting comments by December 2nd on the notice. Included in what they are asking for comments on are:
- Whether further guidance is needed to clarify the interaction of Sec. 274(a)(1)(A) entertainment expenses and business meal expenses.
- Whether the definition of entertainment in Regs. Sec. 1.274-2(b)(1)(i) should be retained and, if so, whether it should be revised.
- Whether the objective test in Regs. Sec. 1.274-2(b)(1)(ii) should be retained and, if so, whether it should be revised.
- Whether the IRS should provide more examples in the regulations.
We hope this review has been helpful. If you have any concerns or questions, please feel free to call or email us and we can talk. That's what we're here for.