Even though the Internal Revenue Service (IRS) changed the law regarding the deduction of business meals almost one year ago, some people still feel confused about what they can and cannot deduct. According to the IRS’s own publication, the Tax Cuts and Job Act (TCJA) of 2017 eliminated the opportunity for taxpayers to deduct expenses they incurred for activities that fall into the category of amusement, entertainment, or recreation.
However, a taxpayer may still deduct up to 50 percent of the cost of a business meal if he or she is present. An employee of the taxpayer may also go in his or her place. The person eating the meal should be a current client, customer, or consultant or someone with the potential to become one. Additionally, purchasing food and beverages during an entertainment event such as a football game would not be an entertainment expense if purchased separately from the tickets.
Before the changes went into effect in late 2018, a business owner could deduct up to 50 percent of any entertainment expenses related directly to business activities. The entertainment activity must have taken place before or after a legitimate business discussion. That changed with the passage of this new IRS regulation.
On-Site Meals for the Benefit of the Employer
Another big change with the TCJA of 2017 is that employers can no longer deduct 100 percent of the cost of providing on-site meals in an employee cafeteria. When the IRS changes went into effect, employers could only deduct 50 percent of the cost of providing food in an on-site cafeteria or elsewhere on the business premises. Employers will not be able to deduct these costs at all beginning in 2025.
Meal Deductions Must Meet Three Basic Criteria
Before you can claim the 50 percent meal deduction, you must ensure that your expenses meet all three of these criteria:
- The expense you’re claiming must be an ordinary and necessary cost. The IRS would likely disqualify anything it considered extravagant.
- You must expect to receive a concrete benefit for your business by incurring the expense. The primary reason for the meal must be to discuss business. That means you can’t go out with a group of friends for entertainment purposes, talk business for a few minutes, and claim the dinner check as a tax deduction.
- You must provide the following documentation with the business meal deduction: the amount spent, date of the meal, name of the restaurant, and the business relationship of all parties involved.
Strategic Tax Planning Help for Small Businesses
Chicagoland CPAs offers a wide range of tax services for small businesses in Chicago and the surrounding communities. We invite you to contact us at 773-930-4503 and ask for extension 103 to learn more or to request an appointment.