Business Meals Deductions Made Easy: Your Guide
TLDR (Too Long; Didn’t Read): Business meals are still allowable after the passing of the TCJA. 50% is the deduction allowed for most business meals, see below for exceptions. Documentation of cost, business purpose and relationship to individual provided meal is required. Meals provided during entertainment events must be on a separate receipt or listed separately on invoice to be deducted.
The passing of the Tax Cuts and Jobs Act (TCJA) in 2017 brought more changes to the tax code than any other event since the Tax Reform Act of 1986. One of the major changes to business deductions removed entertainment expenses as an allowable expense after December 31, 2017. Entertainment expenses are defined as;
· An activity generally considered to be entertainment, amusement or recreation,
· Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or
· A facility or portion thereof used in connection with any of the above items.
How did this change affect the deductibility of business meals? There was a lot of debate around this issue as the IRS did not clarify whether meals fell under the “entertainment” umbrella. In October of 2018 the IRS issued Notice 2018-76 to clarify the allowability of meals as a business deduction. In the Notice the IRS laid out five requirements that would allow a business to deduct meals.
· The expense must be both ordinary and necessary and paid or incurred during the tax year in carrying on a trade or business.
An ordinary expense is an expense that is common and accepted in the taxpayer’s line of work. A necessary expense is an expense that is helpful and appropriate for work. An expense need not be required in order to be considered necessary. Facts and circumstances must be considered to determine whether an expense is ordinary and necessary
· The expense is not lavish or extravagant under the circumstances.
· The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverage.
· The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact. If a group of business acquaintances takes turns picking up each other’s meal checks without regard to whether any business purposes are served, no member of the group can deduct any part of the expense.
· In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
If a business meal meets these requirements it is allowed as a deduction. There are limits to the amount of the deduction and most business meals will fall under the 50% rule, meaning only 50% of the cost will be allowed. There are different rules for businesses, and employees, in the transportation industry so make sure you check with your tax expert to see if your business qualifies under those rules. When doing your accounting, enter the full cost of the meal and let your tax preparer calculate for you or you could miss out on a portion of the expense.
As always make sure that you have the documentation to support the expense. Special rules apply for substantiation of expenses for meals. The taxpayer must maintain records that include: the amount of the expense, the business purpose of the expense, and the business relationship between the taxpayer and persons provided meals. Documenting this on the receipt itself directly after the meal is an easy way to meet the substantiation requirement.
I hope that this article has helped clarify any questions you may have had regarding the allowability of deducting meals as a business expense, what constitutes a business meal versus a non-business meal and the documentation requirements to support the expense. There are a variety of rules around the meals expense that I did not cover here to keep this as concise as possible so please make sure you are consulting with your local tax expert on any meal related questions you may have. Thank you for taking the time to read and may your businesses thrive and prosper in 2020.