Update on Deducting Business Meal and Entertainment Expenses

The federal income tax treatment of business-related meal and entertainment expenses has been a moving target the last few years. If you're confused about what rules currently apply, you're not alone. Here's a refresher on what's currently deductible—and what's not.

TCJA Impact

Before the Tax Cuts and Jobs Act (TCJA) went into effect, you could deduct 50% of the cost of most business entertainment. This treatment aligned with the rules for deducting 50% of the cost of business meals.

For 2018 and beyond, the TCJA permanently eliminated deductions for most business-related entertainment expenses. That means businesses could no longer deduct anything for expenses, including taking customers golfing or treating them to a night at the opera. But they could still deduct 50% of the costs of business-related meals under the TCJA.

IRS Regulations

For a couple years after the TCJA was signed into law, the impact of the general disallowance of write-offs for entertainment expenses on the deductibility of business-related meals was unclear. The IRS finally issued regulations in 2020 to clarify matters. Here are key components of that guidance.

Definition of "food and beverage costs." This term refers to all food and beverage items, regardless of whether they're characterized as meals, snacks or after-dinner cocktails. It means the full cost of such items—including any sales tax, delivery fees and tips.

Meals vs. entertainment. For purposes of the general disallowance of deductions for entertainment expenses, the term "entertainment" doesn't include food and beverages unless:

• The food and beverages are provided in conjunction with an entertainment activity (for example, hot dogs and beers at a basketball game), and
• The food and beverage costs aren't separately stated.

To be 50% deductible in 2023 and beyond, food and beverages consumed in conjunction with an entertainment activity must either be:

• Purchased separately from the entertainment, or
• Separately stated on a bill, invoice or receipt that reflects the usual selling price for the food and beverages if they were purchased separately from the entertainment or the approximate reasonable value of the food and beverages if they weren't purchased separately.

That means you'll need to obtain detailed receipts from entertainment venues if you want to deduct these costs.

50% deduction for business meals. The regs allow businesses to deduct 50% of the cost of business-related meals, as was the case before the TCJA. However, no deduction is allowed for business meals unless the following three conditions are met:

1. The expense isn't lavish or extravagant under the circumstances,
2. The taxpayer (or an employee of the taxpayer) is present at the furnishing of the food and beverages, and
3. The food and beverages are provided to the taxpayer or a business associate.

The term "business associate" means a person with whom you reasonably expect to deal with in the conduct of your business. Examples include an established or prospective:

• Customer,
• Client,
• Supplier,
• Employee,
• Agent,
• Partner, or
• Professional advisor.

The regs also clarify that you can deduct 50% of the cost of a business-related meal for yourself—for example, if you're stuck somewhere working late at night.

Important: Under temporary relief provided during the pandemic, businesses were allowed to deduct 100% of the cost of business-related meals that were provided by a restaurant in 2021 or 2022. That provision expired at the end of 2022.

Meals while traveling. The general rule is that 50% of the cost of meals while traveling on business can still be deducted. The longstanding rules for substantiating meal expenses still apply—so hold on to your receipts. 

The regs also reiterate the longstanding rule that no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals who accompany the taxpayer on business travel (or accompany an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual. For example, meal expenses for your spouse are deductible if he or she works in your business and accompanies you on a business trip for legitimate business reasons.  

Favorable Exceptions

Before the TCJA, the following favorable tax-law exceptions allowed 100% deductibility for eligible meal and entertainment expenses. A little-known fact is that the regs confirm that these exceptions still apply in the post-TCJA world. So, your business can deduct 100% of:

• Meal and entertainment expenses that are reported as taxable compensation to recipient employees.
• Food, beverage and entertainment expenses incurred for recreational, social or similar activities that are incurred primarily for the benefit of employees other than certain highly compensated employees. For example, you can deduct the costs of food, beverages and entertainment at company picnics or company holiday parties that can be attended by all employees.
• The cost of food, beverages and entertainment made available to the general public. For example, a retailer can deduct free snacks that are available to shoppers. 
• The cost of food, beverages and entertainment sold to customers for full value, including the cost of related facilities. Also, a restaurant or catering business can deduct 100% of the cost of food and beverage items that are purchased in connection with preparing and providing meals to paying customers and that are consumed at the worksite by employees who work in the restaurant or catering business.
• The cost of meals and entertainment that are reported as taxable income to a nonemployee recipient on a Form 1099. For example, it's fully deductible to award a potential customer at a sales presentation a dinner cruise for 10 valued at $750, if the recipient is issued a Form 1099.

Mixed Bag

Under current law, businesses generally can't deduct entertainment expenses paid or incurred after 2017 and business meals are only 50% deductible in most situations. But some taxpayer-friendly exceptions apply. Contact your SSB tax advisor to make sure your company's policies and procedures comply with the IRS rules and recordkeeping requirements.

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