March 19, 2019
Author: Ben Halverson
Organization: Lorman Education Service
Following the implementation of the Tax Cuts and Jobs Act of 2017, business professionals may have noticed sizable changes in the deductibility of business entertainment and meals. While many working professionals were more than aware of the monumental tax law change, overlooking how the change impacts meal and entertainment expenses isn't outside of the realm of possibility.
Without going into an in-depth analysis of the tax reform as a whole, business owners should certainly be looking into the way that these new meal and entertainment rules may impact their business come tax season. Now, more than ever, gaining a solid understanding of the tax laws and properly categorizing expenses is critical to surviving tax time. Below is an overview of shifts in the realm of tax-deductible meal and entertainment expenses.
Understanding the IRS' definition of meals and entertainment is critical to understanding the regulations that are in place. According to the IRS:
- Meals were previously defined simply as food or beverages
- Entertainment encompassed just about anything you could imagine would serve as entertainment
These definitions were intentionally vague. Not only did businesses not want to deal with nitpicking every minor expense-- the IRS really didn't want to be responsible for coming up behind organizations and creating more work for themselves, either. A list of exceptions for full deductibility has always been around-- usually office holiday parties and other "fringe benefits" of being a part of a workplace.
Prior to the change in tax laws, it was generally accepted that business could deduct up to fifty percent of their expenses relating to entertainment and meals. In some cases, specific exceptions applied and these meals and entertainment events would be 100% deductible.
Generally speaking, entertainment expenses are now widely nondeductible and the bulk of meals remain fifty percent deductible. Wording and regulations for meals and entertainment have gotten tighter; some tax professionals have indicated that they anticipate the IRS to begin heavily scrutinizing these expenses.
Any activities considered to be solely for recreation, amusement, or entertainment are now ineligible for deduction per Section 274(a). However, there is still a 100% deduction available under Section 274(e)(4) intended for recreational or social activity expenses that are primarily for employees' benefit.
Most food and beverage costs that previously qualified for a fifty percent deduction still qualify for that same deduction-- think employee meals over the course of business travel. Depending on how statutes are interpreted, some meals with clients and other business contacts may now be classed as entertainment expenses and be ineligible for deduction.
If you're uncertain of whether a business meal will qualify for a deduction, consider the following requirements:
- Either the taxpayer or an employee of the taxpayer must be present at the meal
- The expense cannot be extravagant or lavish
- The expense must, under Section 162, be considered ordinary and necessary
- The food and beverages provided must be intended for current or potential business customers, clients, consultants, or similar
- Food and beverages are required to be purchased separately from coinciding entertainment activities
- Or, food and beverage costs must be stated separately from entertainment costs
- Cannot be circumvented by way of artificial food and beverage charge inflation
If you're unsure of how the once-in-a-generation tax law overhaul may impact you or your business, contact Lorman Education Services today. We offer our clients a range of professional continuing education services to ensure that they can stay ahead of rapidly evolving compliance, regulatory, and business topics. Snag our all-access pass for unlimited access to nearly 15,000 courses and resources designed to help you maintain control over the direction of your business.