Among many significant changes, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deduction for expenses related to activities considered entertainment, amusement or recreation, but it still allowed taxpayers to deduct a portion of the cost of business meals. Now, nearly three years after the law passed, the IRS has released final regulations to clarify the limitations of the food and beverage deduction, as well as what is considered entertainment.
All taxpaying businesses and entities that regularly provide business meals or entertain prospects, clients and customers should review the new regulations and begin separating non-deductible items into separate account when outlining expenses.
Here is a brief overview of the final regulations:
Food and beverage deductions
Under the TCJA, taxpayers can deduct 50% of the cost of a business meal if the taxpayer or an employee of the taxpayer is present, the meal is provided to a current or potential client, customer, consultant or similar business contact, and the meal is not considered lavish or extravagant. Concerning the latter, the IRS does not define “lavish and extravagant,” so rely on common sense — i.e. four lobster tails, two bottles of premium wine and some chocolate sundaes for the road might be a bit lavish for two people.
If the meal is provided during an entertainment activity, the food and beverage must be purchased separately, or the food and beverage cost must be stated clearly and separately on a bill, invoice or receipt. For example, if a taxpayer takes a client out to a live show that includes a meal, the food and beverage must be itemized on the check for the 50% deduction to be allowable; if the bill is for one full amount that includes the cost for the show, it will not be deductible.
Food and beverages must also be considered ordinary (an expense considered common and accepted in the taxpayer’s business) and necessary (an expense that is helpful and appropriate, but not necessarily required, in the taxpayer’s business). Again, this is slightly up to interpretation, but it is generally understood what is in bounds when it comes to business meals.
The new regulations also address travel meals, which are subject to the same general rules as business meals.
While the TCJA did eliminate the entertainment deduction, meaning activities such as a taking a client out for a round of golf may, in most cases, no longer be a write-off, there remain a number of exceptions. These include employee activities, entertainment treated as compensation, or prizes and awards.
Sometimes, these exceptions may include food. In an example found within the final regulations, an employee holiday party at a hotel ballroom that includes a buffet dinner and open bar is not subject to the deduction limitations.
As with most matters concerning the tax code, there are more nuances and exceptions concerning these rules than can be explained in one article. For more information on these regulations and other tax matters, feel free to reach out to McClintock & Associates.