(This article has been updated to reflect clarifications in the deductibility of business expenses for employee social gatherings)
Wining and dining clients, prospects and business contacts has been, and continues to be, a great way to grow your business and build valuable business relationships. This practice helps establish personal connection and trust. For these reasons, business-related meals and entertainment expenses have always been legitimate tax deductions.
In the past, a 50% deduction was available for virtually all meal and entertainment expenses, provided they were not overly extravagant and the occasion was business-related.
However, the federal Tax Cuts and Jobs Act (TCJA) has removed many of these deductions. While some deductions have been removed, there are still many expenses that qualify for the business meal deduction, if handled properly.
In this post, we will outline which specific deductions have been removed, which ones remain, and the steps you can follow to take full advantage of the new tax law.
Which deductions were removed?
TCJA specifically denies deductions for expenses for entertainment, amusement or recreation. The most major change was the removal of deductions for tickets to sporting events and concerts. Previously, you could deduct 50% from the face value of the ticket, any skybox expenses, and transportation to/from parking areas.
You are still not allowed to deduct club (including country, social, athletic and sporting club) membership dues. However, meals incurred at a club may be deductible, subject to the 50-percent disallowance rule, if incurred in furtherance of the taxpayer's trade or business.
What remains eligible for the business meal deduction?
Despite these new exclusions, you can still qualify for a business meal deduction in a number of different circumstances.
The client business meals themselves remain 50% deductible, provided that business is conducted at the event, the taxpayer is present, and the meal is not extravagant.
The 50% business meal deduction also remains for food and meals provided for employees. This includes snacks and beverages at the office, meals during meetings or business travel, and meals at a seminar or conference.
You can even deduct 100% if the meal is included as taxable compensation to the employee.
Expenses for office holiday parties and other employee social gatherings remain 100% deductible as long as they are held for the benefit of all employees. This includes the costs of meals and entertainment. Also, meals provided to employees working overtime or during a staff meeting are still 100% deductible.
What about meals at an event?
In the past, you could deduct 50% of the total expenses for the event. Under the new law, however, only the cost of meals can qualify for the 50% business meal deduction.
For example, let’s say you want to take your client to the Ravens vs. Redskins game. You buy tickets for a suite where all the refreshments are included in the price of the ticket. In order to qualify for the 50% deduction, the cost of all food and beverages provided must be stated separately from the rest of the ticket price. The cost of the food is deductible while the rest of the cost for the ticket remains an entertainment expense, not qualifying for a deduction.
What should I do to receive these deductions?
To ensure that you receive the maximum tax benefit for your business meal expenses, follow these 3 easy steps:
- Make sure that your expenses meet the qualifications of a “business expense.” Here’s the test: a) a member of the company (or the taxpayer) must be present at the event when the food or beverage is furnished, b) the person you are treating must be a current or prospective client, consultant or business contact. The purpose of the event must be business-related, c) Finally, the expenses must not be extravagant.
- Make sure you know how much you can deduct for each expense. Some expenses qualify for the 50% deduction, some for a full 100% deduction.
- Separate your business meal deductions and entertainment expenses on your books. Have three separate general ledger accounts: 100% deductible meals, 50% deductible meals, and non-deductible entertainment. This will make it easy for your accountant come tax time, and make sure you are getting the highest possible tax savings from business meal expenses. It will also help if you are audited because you will need to show this documentation.
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