2018 Tax Reform Impact on Meals & Entertainment
[This post was updated on 11/5/18]
The Tax Cut and Jobs Act of 2017 (TCJA) puts stricter limits on what businesses can deduct for meals and entertainment expenses for amounts incurred or paid after December 31, 2017.
As part of the new law, there has been a lot of discussion regarding the question of whether a business meal with a client, prospect, business associate, or referral sources should be treated as nondeductible entertainment or as deductible business meals under the new law. A strict reading of the new law indicates these types of meals are considered “entertainment” and no longer deductible.
In early October, the IRS issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under the TCJA.
According to the IRS, the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but do not address the deductibility of expenses for business meals. This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.
Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when 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 when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they 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 IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.
The Jones & Roth tax team has put together a reference chart as a tool to help you navigate the various changes.
The following table compares the rules before and after the Tax Cuts and Job Act:
|Expense Description||2017 Expenses (Prior Law)||2018 Expenses (New Law)|
|Office holiday parties, picnics, events for employees and customers||100% deductible for portion allocated to employees; 50% deductible for portion allocated to customers||100% deductible for portion allocated to employees; UPDATE: portion allocated to customers is deductible, provided current treasury guidance noted above|
|Employee meals provided for convenience of employer (ex. meals provided by employer for employees working overtime or meals provided at onsite cafeteria)||100% deductible||50% deductible
(non-deductible after 2025)
|Employee meals while traveling away from home overnight||50% deductible||50% deductible|
|Employee meals for required business meeting
(ex. employer-provided lunch during marketing or education meeting)
|50% deductible||50% deductible|
(ex. coffee, soft drinks, bottled water, donuts and similar snacks or beverages)
|100% deductible||50% deductible (non-deductible after 2025), however, does not appear to be what Congress intended. Technical corrections may provide for 100% deductible.|
|Items available to the general public
(ex. complementary coffee & snacks in lobby area)
|100% deductible||100% deductible|
|Meals expense for attendance of a business league, chamber event, or trade/association meeting||50% deductible||50% deductible|
|Employees (2 or more) working lunch/dinner mtg.||50% deductible||50% deductible|
|Entertaining clients, employees, referrals sources, vendors, etc.
(ex. golf scramble, sporting event tickets, theaters, country clubs, and other purely entertainment related charges that are directly related to taxpayer’s business and can be properly substantiated)
|50% deductible||No deduction for entertainment-related expenses, including meals|
|Entertainment-related meals||50% deductible||No deduction|
|Client/Prospect Business Meals (ex. business owner treats a potential client to lunch and discusses matters directly related to business between the two)||50% if taxpayer is present and not lavish or extravagant||UPDATE: 50% deductible, provided current Treasury guidance noted above|
|Reimbursed meals and entertainment expenses
(ex. business charges its clients fees plus expenses and provides their clients with detail of the expenses on the invoice sufficient for client to determine deductibility of the expense)
|100% deductible provided the taxpayer accounts to such person or business with detail of the expenses on the invoice||100% deductible provided the taxpayer accounts to such person or business with detail of the expenses on the invoice|