New Tax Rules for Meals and Entertainment Expenses
As the 2018 calendar year end approaches, taxpayers should be aware of the new meals and entertainment rules for tax deductibility.
Prior to December 31, 2017, taxpayers could deduct 50% of the meals and entertainment expenses that were related to their trade or business. The 2017 Tax Cuts and Jobs Act (TCJA) eliminated the deduction for entertainment expenses and made changes to the deductibility of certain business-related meals.
New Regulations Affecting Entertainment Expenses
Under the TCJA, entertainment expenses incurred on or after Jan. 1, 2018, are nondeductible. Entertainment is defined as any activity which is a type generally considered to constitute entertainment, amusement, or recreation such as entertaining at:
- Night clubs
- Cocktail lounges
- Country clubs
- Golf and athletic clubs
- Sporting events
- Hunting, fishing, vacation and similar trips
This includes such activity relating solely to the taxpayer or the taxpayer's family.
For food and beverages purchased at or during an entertainment activity, the cost of food and beverages are deductible, subject to the 50% limitation, as long as they are purchased separate from the entertainment or stated separately from the cost of the entertainment on bills, invoices or receipts. Also, the taxpayer or an employee must be present when the food or beverages are provided.
Taxpayers will want to take care to have appropriate documentation and support that breaks out any food and beverages from entertainment related activities to ensure they can properly claim the deduction on their tax return.
New Tax Regulations Affecting Business Meals
The IRS recently issued guidance indicating that taxpayer’s can still generally deduct 50% of the food and beverage expenses related to operating their trade or business (Certain conditions must be met but generally most ordinary and necessary business-related meal expenses will qualify).
The TCJA did make changes to “de minimis fringe benefits” and expenses for meals that were provided to employees for the convenience of the employer. These expenses, which include coffee or donuts provided for the office, were previously fully deductible. Under the TCJA these items are now subject to the 50% business meal limitation as well.
The new law does continue to allow a 100% deduction for employee recreational activities and events such as company holiday parties and annual company picnics as long as such activities are open to all employees and do not discriminate in favor of highly compensated individuals.
Update Your Internal Policies And Procedures
The Department of the Treasury and the IRS have indicated further guidance will be forthcoming. In the meantime, taxpayers should review and update their internal policies and procedures for meals and entertainment related expenses so they don’t miss out on the opportunity to properly claim any tax deductions, and to ensure that they have the necessary support to protect themselves under an audit.