Tax Planning Madison

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Additional Guidance on Business Deductions for Meals and Entertainment

The Tax Cuts and Jobs Act (TCJA) of 2017 placed new restrictions on business deductions for meals and entertainment expenses associated with meeting current or potential clients, customers, consultants and other business contacts. In response to ongoing confusion about the new rules, the IRS recently offered additional guidance and proposed regulations governing these deductions for recent and future tax years.

As a broad rule, business owners and self-employed taxpayers may deduct up to 50% of the cost of meals directly related to conducting business. Examples might include meeting with potential clients over lunch, purchasing meals during business travel, or ordering food delivery for an after-hours employee meeting.

Deducted meal expenses must not be lavish or extravagant.

In addition, the taxpayer, or an employee of the taxpayer, must be present for the furnishing of food and beverages. Therefore, sending pizzas to a potential client’s office would generally not qualify for the business meal deduction.

The recent IRS notices and proposed regulations emphasize that meal expenses incurred while traveling are subject to the TCJA’s expense substantiation rules. Therefore, these costs must be carefully documented with detailed records. The IRS has also clarified that whereas certain employer-provided meals for employees may have been fully deductible prior to tax year 2018, these meals are now generally subject to the 50% meal deduction limit.

Most importantly, with a very few rare and complicated exceptions, the TCJA eliminated the business deduction for entertainment expenses. In the past, potentially allowed entertainment expenses included tickets to concerts and sporting events. These expenses can no longer be deducted in any amount, and taxpayers are expressly forbidden from attempting to circumvent the law by reclassifying the expenses as “advertising,” “research,” etc.

The IRS recognizes, however, that certain entertainment activities also include food and beverage expenses. The proposed regulations affirm 2018 IRS guidelines, which state that meal expenses related to an entertainment activity may only be deducted if the food and beverage expenses are clearly separate from entertainment costs.

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