Until recently, a particular paragraph contained within the Tax Cuts and Jobs Act was causing significant heartburn (from a potentially non-deductible meal) for tax preparers, business owners and those within the restaurant industry. Now, the IRS has provided clarification for the business meals deduction.
As part of the tax reform bill, entertainment expenses formerly subject to a 50% limitation (meaning only 50% of the expense qualifies as a tax deduction) were dropped to 0%, i.e. completely non-deductible. The problem was, the tax bill did not specifically address the business meal deduction, also subject to the 50% limitation. Uncertainty regarding the safety of the business meal deduction quickly grew. Could business meal expenses be given the same axe, er, steak knife that cut down entertainment?
Business meals deduction
With the recent release of IRS Notice 2018-76, concerned parties can breathe a sigh of relief (just don’t call it a party, that sounds like entertainment.) The business meal deduction has been preserved under the new tax bill, but is still subject to the 50% limitation, and still must meet several tests in order to be deductible. The primary keys to making sure your meal is deductible are:
- The expense is ordinary and necessary in carrying on a 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 time of the expense
- The meal is provided to a current or potential business customer or client
- Food and beverage expenses are separately stated from any entertainment expenses incurred
With this new distinction between meals and entertainment, it is extremely important for you to maintain diligent records that clearly split out meal expenses from entertainment. For example, if you purchased a suite at a Phoenix Suns basketball game, you would want to make sure that your invoice specifically states the cost of food and beverage separately from the cost of the suite itself. Now, there may be a valid argument that a Suns game shouldn’t qualify as entertainment anyway these days, but the folks at the IRS are easily entertained.
For more decadent (but not extravagant) details, check out the full Notice 2018-76, or simply consult your trusty Henry+Horne tax advisor.
Austin Bradley, CPA