IRS Makes Clear That Most Business Meals Still 50% Deductible
The IRS has issued guidance clarifying that taxpayers may generally continue to deduct 50% of food and beverage expenses.
Although last year’s Tax Cuts and Jobs Act contains many benefits for security companies, it did eliminate some business entertainment deductions.
In general the act eliminates the deduction for entertainment expenses such as large parties, sporting events, golf outings and cruises. The way that the act was written it also appeared to eliminate some business meals.
Business owners were concerned that the disallowance would extend to many client or even potential client business meals. Thankfully, the IRS issued Notice 2018-76, which provides transitional guidance on the deductibility of business meal expenses in light of the act’s disallowance of deductions for entertainment expenses.
The IRS notice clarified that actual business meals — in which business is actually discussed — are still deductible. To be deductible the meal must be on a separate receipt. This means that a business meal after a sporting event would be deductible if it is on a separate receipt.
The actual event, however, would not be deductible. If the sporting event includes food and drinks — for example, in a private box — its cost is not deductible.
Until proposed regulations are effective, the notice states that taxpayers may rely on the guidance for the treatment under IRC § 274 of expenses for certain business meals. In other words, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in 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 at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages 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 entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
As we approach the end of the year you should consult with your tax professional regarding the deductibility of certain expenses, including the Pass Through Income Deduction, the non-deductible of certain employee business expenses, and other restrictions on employee meals.
Don’t wait until March or April when it is too late.
Mitch Reitman is Managing Principal of Reitman Consulting Group. He is a member of the SSI Editorial Board and a member of the SSI Industry Hall of Fame.
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