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Serving Meals with Entertainment? Don’t Forget This Tax Detail

  • 27 November 2018
  • Author: Alexander Carr
  • Number of views: 1811
Serving Meals with Entertainment? Don’t Forget This Tax Detail

The recently enacted Tax Cuts and Jobs Act (TCJA) included a significant change for those deducting meals and entertainment from their business taxes. As of 2018, there is no longer a deduction for activities considered entertainment, amusement, or recreation, unless the event is for team building or similar purposes and is attended on a non-discriminatory basis. Business meals, on the other hand, are 50% deductible. But what about events in which both meals and nondeductible entertainment are served? The IRS is finally offering some guidance.

In a recent notice, the IRS clarifies that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business if:

  • The expense is “ordinary and necessary” per tax code and is not “lavish or extravagant” under the circumstances.
  • The taxpayer or employee of the taxpayer is present when the food or beverages are served.
  • The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact.

When entertainment (including amusement or recreation) is also provided, the food and beverages should either be purchased separately or stated separately from the cost of the entertainment within the invoice or receipt. That’s because your ability to deduct meals when served alongside entertainment rests in how they’re billed. The IRS offers the scenario of a business taxpayer entertaining a business contact in a private suite at a basketball game. The food and beverages served to them in that suite cannot be deducted if they’re included in the price of the ticket package. They can be 50% deducted, however, if they are itemized out on the bill.

Resist the temptation to get creative: The IRS specifically warns that the entertainment disallowance rule may not be circumvented by inflating the amount charged for food and beverages. In other words, claiming you took clients to the ballpark or a country club with an award-winning golf course just for the food will likely raise eyebrows.

The bottom line is that when you wine, dine and entertain business contacts, be sure to ask for itemized invoices or receipts. While it wasn’t mentioned in the latest guidance, you should also be prepared to provide the time and place, business purpose, and business relationship related to the expense since that type of documentation is traditionally required for business meal expenses. Without those details, you may lose your ability to deduct food and beverages altogether.  

We can expect to see further guidance and regulations for meals and entertainment in 2019, including a more formal and in-depth code update on how meals will be handled within the context of entertainment. We’re also awaiting further guidance on a related issue: How to deduct meals furnished regularly to employees on business premises. While those meals were once 100% deductible, they’re now 50% deductible and are scheduled to be phased out completely by 2025.

In the meantime, feel free to contact us if you have specific questions. 

Photo by rawpixel on Unsplash

Categories: Blog, General
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