Dining with and occasionally entertaining business clients is a necessary and accepted norm to close deals, win new clients, and build stronger business relationships. Although the Internal Revenue Service (IRS) recognizes this, it also implemented new rules regarding what people can deduct for business meal expenses with the Tax Cuts and Jobs Act (TCJA) of 2017. It’s important that anyone who dines with or entertains clients understand the new laws to avoid claiming a deduction they’re no longer entitled to receive.
The Old Law and the New Law
Prior to the TCJA, business professionals could deduct 50 percent of both meal and entertainment expenses they incurred with clients. They could even deduct 100 percent of the cost in limited situations. The rules were vague enough to cover any type of food or beverage expense as well as an event classified as entertainment, recreation, or amusement. Business owners could also deduct costs associated with office parties and meals or snacks provided as an on-site benefit to employees.
Under the new law, businesses may not deduct any type of entertainment expense at all. However, the IRS allows for the following exceptions:
- Entertainment items purchased and sold to customers
- Food and beverages purchased and given to the public
- Expenses paid to people who are not employees, including independent contractors
- Business meetings held for stockholders and employees
- Business league meetings organized as a 501c (6) non-profit
- Expenses counting as compensation
- Entertaining employees if there’s a business purpose
- Recreational activities for employees to include such things as company picnics
- Expenses reimbursed by customers
Another important exception is businesspeople who incur entertainment expenses considered necessary and ordinary in their industry. While tickets to a live theatrical performance would be strictly entertainment in most industries, it would be necessary for someone who wrote entertainment reviews for a local newspaper. The expense would be 100 percent deductible in the second situation.
New Stipulations for Business Meal Deductions
To claim a deduction for a business meal, it must not meet the definition of extravagant or lavish. The meal also needs to be for legitimate business purposes for which you have a reasonable expectation of earning a future income due to the business meeting. Lastly, the business meal must take place at a restaurant and not a venue that the IRS could consider entertainment such as a cocktail lounge or sports arena.
The new law under TCJA no longer permits employers to deduct 100 percent of the cost of food and beverages purchased for an employee cafeteria, for meetings, or for rewards. Employers can now only deduct 50 percent of the cost unless the food is part of a recreational event for employees.
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