Question: Are Business-Related Meals and Entertainment Still Deductible?
Answer: Fifty percent of all costs of reasonable business-related meals are deductible. Some exceptions exist. Except for limited situations and categories of expenses, entertainment costs are not deductible.
After reviewing early commentary about the Tax Cuts and Jobs Act (“TCJA”), I find that there seems to be a good bit of confusion about whether or not business-related meals are deductible in 2018 and beyond. Below, I support my conclusion. However, my word may not be the final word.
Let’s start with a quick overview of the old rules. Importantly, let’s confine our inquiry to meals and entertainment involving employees, customers, clients, vendors, and business referral contacts.
1. Entertainment, amusement, recreation, or meals costs were not deductible as trade or business expenses unless they were (1) directly related to the active conduct of a trade or business, or (2) directly before or after a substantial and bona fide business discussion associated with the conduct of the trade or business.
2. Generally, the business deduction for reasonable meals and entertainment expenses was limited to 50 percent of such expenses.
3. Meals provided employees for the benefit of the employer and, generally, on the premises of the employer were 100 percent deductible.
4. There were a number of exceptions. However, most expenditures (at least by number of occurrences) by most businesses fell in the “general” 50 percent or 100 percent categories.
I interject here an observation about the old law. Relying on years of practice and after a review of authoritative sources and of commentary, I think it is safe to say that prior to the TCJA, most tax practitioners viewed the deductibility of the general categories of meals and entertainment through the lens of almost a single word: “mealsandentertainment.” Basically, the same limitations applied to meals and to entertainment. In assessing the deductibility of meals or of entertainment in the general and prevailing sense, the same standards were applied to meal expenditures and to entertainment expenditures by practitioners, the IRS and courts.
Then came the TCJA. The deductibility of meals costs and the deductibility of entertainment costs appear to be divorced.
Let’s review quickly the legislative history of the parts of the TCJA that we are discussing. First, the House of Representatives considered the deduction of meals and entertainment. The House version of the TCJA repealed the deductibility of all general 50 percent and 100 percent meals and entertainment expenses. The Senate bill followed the House bill, except it retained the general 50 percent deduction of food and beverage expenses associated with operating a trade or business. Also, the Senate bill provided that the “100 percent category” for meals provided for the convenience of the employer was retained (through 2025 and repealed thereafter), but limited to 50 percent deduction;
The TCJA follows the Senate version.
Now, Section 274 of the Internal Revenue Code, entitled “Disallowance of certain entertainment, etc., expenses.” provides, in part, in subsection (a) that “([n]o deduction otherwise allowable under this chapter shall be allowed for any item . . . with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation . . . .” Section 274(a) does not mention meals. In subsection (e) of Section 274, there are listed specific exceptions to the repeal of deductibility in subsection (a). One exception is food and beverages for employees on the premises of the employer. Sec. 274(e)(1).
Section 274(k) addresses business meals. It provides that no deduction is allowed for food and beverage expenses unless “(A) such expense is not lavish or extravagant under the circumstances, and (B) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverage.”
Section 274(n)(1) provides that any deduction for income tax purposes “for any expense [emphasis added] for food or beverages shall not exceed 50 percent of the amount of such expense which would (but for this paragraph) be allowable as a deduction” for income tax purposes.
Thus, I conclude the following:
1. Can you deduct 50 percent of business meals and beverages costs that you deducted before the TCJA changes? Yes. Until further guidance, follow the same rules in effect before the TCJA.
2. Entertainment expenses incurred by most businesses are not deductible.
3. Would 50 percent of reasonable food and beverage costs associated with entertainment be deductible under the new provisions in Section 274? It appears so. Until persuasive authoritative guidance to the contrary is offered, I am inclined to deduct such food and beverage costs, if such expenditures would have been deductible before the TCJA. It would be prudent to have the food and beverages charges separately stated.
4. Can you still deduct food and beverages furnished to employees on the premises of the employer for the convenience of the employer? Yes, but you can only deduct 50 percent of those costs.
5. Consider amending your chart of accounts to correctly classify the new expense categories.
Are there many more questions that will arise? Yes. Are there exceptions to the general rules? Absolutely. Will there be further developments? Of course. Contact your HM&M tax advisor to discuss your specific situation.
January 24, 2018
This memorandum is prepared solely for the purpose of providing information about tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances. This memorandum is for educational purposes only and is not intended, and should not be relied upon, as accounting or tax advice. The views expressed by the author are not necessarily those of Huselton, Morgan & Maultsby, PC.
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