The changes resulting in meals and entertainment are among the most confusing and yet unknown within the new Tax Cut and Jobs Law. I have rarely seen anything mentioned in the media regarding this too. Thus, I think that everyone will find this discussion both very important and interesting.
Prior to the Tax Cuts law (in 2017), taxpayers have been able to take clients out to a business lunch and deduct 50% of the cost of the meal. This also applies to fun types of entertainment such as golf, movies, plays and sporting events. In addition, companies can provide employee outings and parties and write off 100% of the cost for the parties if they only invite employees and/or members of their families.
Under the Tax Cuts law, amounts paid or incurred after Dec. 31. 2017 for entertainment are no longer deductible.
Sandy’s elaboration: This is a very big deal that has escaped the notice of most media. Small businesses normally don’t market on major events such as the Olympics or the World Series. They don’t even usually market on television. They market using “belly to belly” marketing. Thus, eliminating the deductions for entertainment such as golf, movies, theater and sporting events is a major deal for small businesses. They probably will still incur this type of expense but won’t be able to deduct it.
However, the deduction for meals, such as at a restaurant with a prospect, still seems to be allowable, although this isn’t clear. I have seen tax professionals rule both ways on this. Thus, if you discuss business at a restaurant, and document this discussion correctly in Taxbot, you seem to be able to still get a 50% deduction for meals
Note: In my previous post about this when the law was just passed, my reaction was that all business meals with prospects wouldn’t be deductible. I have changed my position as I have read what other tax professionals have said. I now believe that meals with business prospects at a restaurant are 50% deductible as long as you don’t pay extra for any entertainment.
In addition, there are other types of meal deductions that seem to be still allowed. Here is a list of what I think will be available to businesses:
- Business gifts: Business gifts would still be deductible up to $25 per person, per year. Gifts to organizations, where no there is no named person to use the gift, would also be 100% deductible as it was in 2017. Most employee achievement awards, however, would be disallowed under the Tax Cuts law especially if it provided cash or gift card rewards.
- All food and prizes for open houses would still be 100% deductible. Thus, Real estate professionals will love this.
- All food served at a business seminar where participants pay for the seminar would appear to be 100% deductible.
- All food served at a sales presentation, such as an opportunity meeting, should still be 100% deductible.
- Any food served on the premises of an employer through an eating facility that meets the requirements for de minimis fringes would be 50% deductible, which is a reduction from the 2017 rules.
- Free food provided to employees such as soft drinks, pretzels etc. are 50% deductible.
- Meals furnished by the employer to keep employees on premises for emergencies or because there are no nearby restaurants in which the employee can get lunch and get back on time are also deductible.
- Meals bought while on business travel can be reimbursed by the employer.
- Meals bought while on business travel are 50% deductible.
- Meals treated as compensation to employees are 100% deductible.
- Meals served to employees and stockholders at business meetings are 100% deductible.
- Meals and other expenses directly related and necessary to the attendance of business meetings of certain charitable organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade are 100% deductible.
- Expenses of goods and services made available to the general public, such as food served in an open house or at an opportunity meeting are 100% deductible.
- Expenses for goods or services sold in a bona fide transaction for full consideration in money or money’s worth are 100% deductible. Thus, food served at a restaurant are deductible by the restaurant.
- Holiday party costs where everyone is your employee or members of their family would seem to be 100% deductible.
My opinion is that although the meal deduction with prospects at a restaurant is one of the only meal deductions that is uncertain, my recommendation and that of many other tax professionals that I have discussed this issue with, is to take the 50% meal deduction with prospects IF…
- You meet the six elements of documentation noted in Taxbot and,
- Have receipts to document these expenses.
This is recommended for several reasons:
It might be deductible under the new law.
- Even if IRS opines that it isn’t deductible, they may provide a grace period for the deduction since this question is not clear, However, having the six elements of substantiation documented in a good tracker would be required.
- If not deductible, Congress may change the law to conform with the intent of the law. However, you will want to have the six elements of substantiation available just in case this happens, and…
- Even if the meals aren’t deductible, keeping track of them that you incurred for business will help establish that you are running your business like a business and not like a hobby.