For decades, taxpayers could partly deduct the cost of business-related meals. Yet, many feared the Tax Cuts and Jobs Act (TCJA” eliminated this deduction starting January 1, 2018.
The TCJA eliminated business deductions for “entertainment, amusement, or recreation.” (IRC Sec. 274(a).) This includes most things you’d think of as entertainment and may feared that also included paying for meals or beverages.
Are Business-Related Meals Tax Deductible After January 1, 2018?
Fortunately, the IRS said tax deductions for business-related meals has not been eliminated by the TCJA (IRS Notice 2018-76). You can deduct 50 percent of meal and beverage costs as a business expense. This applies if the meals are “ordinary and necessary” and incurred in the course of business.
You or an employee needs to be present at the meal. You must furnish the meal to current or potential customers, consultants, clients or similar business contacts.
The meal may not be lavish or extravagant under the circumstances. There is no dollar limit on what is not lavish; nor are you barred from eating at deluxe restaurants. Because there are no concrete guidelines, you have to use your common sense.
Business Meals Expense vs. Entertainment Expense
Example: Ivan, a sole proprietor consultant, has had ongoing email discussions with a prospective client. Ivan thinks he’ll be able to close the deal and get a contract signed in a face-to-face meeting.
He chooses a lunch meeting because it’s more informal. The prospective client will like getting a free lunch, too. He treats the client to a $100 lunch at a nice restaurant.
During the lunch, they complete the terms of a contract for Ivan’s consulting services. This meal led to a specific business benefit for Ivan. He can deduct 50 percent of the cost of both his and his client’s lunch as a business expense.
What about meals you provide during an entertainment activity? You can deduct these if it’s purchased separately from the entertainment. Also, you can deduct meals if it’s stated separately on the receipt.
Example: You treat a client to a baseball game (which you also attend) and pay for beers and food while at the game. Since you paid for the beer and food separately, you can deduct 50 percent of the cost. You can’t deduct the cost of the tickets.
What if the cost of tickets for an entertainment event like a ball game include the cost of food and beverages? The food and beverages are not deductible unless separately listed on the bill or invoice. Entertainment facilities offering package deals including food and beverages will doubtless be happy to separately list their cost so you can get a tax deduction.
Keep Good Records
Historically, food and beverage expenses have been closely scrutinized by the IRS because of past abuses by taxpayers. For this reason, it is wise to keep good records of such expenses. Whenever you incur an expense for business-related meals, you must document the following five facts:
- The date.
- The amount. How much you spent, including tax and tip.
- The place. The place the meal and/or beverages were consumed.
- The business relationship. The business relationship of people at the meal—for example, their names and occupations and any other information needed to establish their business relationship to you.
The IRS does not require that you keep receipts, canceled checks, credit card slips, or any other supporting documents for meal expenses that cost less than $75. However, you must still document the facts listed above.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.