Meals & Entertainment Expense
Changes made by the Tax Cuts and Jobs Act place stricter guidelines on what businesses can deduct as meals and entertainment expenses incurred or paid after December 31, 2017. These changes may have an effect on the income reported on your 2018 business tax return.
Changes made by the TCJA
Prior to the Tax Cuts and Jobs Act taxpayers could deduct 50% of business-related entertainment expenses as long as they were:
- Directly related to the active conduct of trade or business, or
- For entertainment directly before or after a substantial and bona fide business discussion associated with the conduct of the trade or business.
Expenses associated with activities considered to be entertainment, amusement, or recreation are now nondeductible, even if a substantial and bona fide business discussion is associated with the activity. Examples of nondeductible activities include entertaining clients at sporting events, social events, theaters, hunting, fishing, and athletic or country clubs.
If meal expenses are incurred during an entertainment event, the cost of the meals must be separately stated from the cost of entertainment to be 50% deductible. For example, if an employer invites a client to attend a basketball game in a suite where the cost of food and beverages is included in the cost of the ticket, the food and beverages are considered entertainment and are nondeductible. However, if while at a game food and drinks are purchased separately from the tickets, the food and drinks would be considered a deductible meal expense subject to the 50% limit.
Prior to the Tax Cuts and Jobs Act, snacks and beverages provided to employees (de minimis fringe benefits) were 100% deductible by the employer. The deduction is now limited to 50%, and those expenses will be nondeductible after 2025 unless the IRS amends the law.
Examples of expenses that qualify as de minimis fringe benefits are:
- Breakfast foods such as fruit, coffee, or bagels provided to employees in the break room
- Meals provided by an employer for employees working overtime on the business premises
Unaffected by the Tax Cuts and Jobs Act
Meal expenses are still 50% deductible if either the taxpayer or an employee of the taxpayer is present, the meals are provided to a current or potential business customer, client, or similar business contact, and the food or beverages are not considered lavish or extravagant under the circumstances.
Meal expenses are generally 50% deductible if incurred while traveling for business or while entertaining a client, customer, or employee. The 50% limit also applies to taxes and tips associated with the meal.
Meals & entertainment expenses treated as compensation to the employee are fully deductible. For example, an employer rewarding an employee with an all-expense paid vacation as long as the employer treats the expense as compensation and wages.
Other examples of fully deductible meals/entertainment expenses are:
- Office holiday parties, annual picnics, or summer outings
- Team lunches at a restaurant as long as it’s considered to be occasional and the entire team is invited
- Team lunches combined with a recreational activity like bowling or attending a sporting event as long as it’s considered occasional, and the entire team is invited. Expenditures paid for the use of a facility in connection with the activity is also fully deductible.
If you have any questions or concerns regarding the recent changes to deductible meals and entertainment expenses, please contact a member of our tax department and we will be happy to provide further clarification, 517.323.7500.
About the Author: Bradley M. Sinicki, is an associate in Maner Costerisan’s tax department. Brad graduated from Saginaw Valley State University with a Bachelor of Professional Accountancy.
Source: United States. Department of the Treasury. Internal Revenue Service. Notice 2018-76: Expenses for Business Meals Under § 274 of the Internal Revenue Code. Web. 27 February 2019.