In October 2018, the Internal Revenue Service (IRS) released information about changes to business meal expenses that it passed under the Tax Change and Job Act (TCJA) of 2017. The TCJA effectively eliminated the ability for businesses and individuals to deduct expenses related to entertainment. This includes such things as sporting events and theater productions.
The legislation, which went into effect in late 2018, continues to allow taxpayers to deduct up to half the cost of business meal expenses. However, the deduction does come with several exceptions. It’s your responsibility as a taxpayer to know and abide by the new rules under the TCJA.
Guidelines Taxpayers Must Meet to Claim Business Meal Expenses
Although the IRS allows taxpayers to deduct 50 percent of the cost of meals and beverages ordered while conducting business, they must meet three specific criteria to do so. These include:
- The meals and beverages you order must fall into the category of ordinary and necessary. That means the cost must be customary for the venue and the items you order for yourself or a business client cannot meet the definition of extravagant in any way.
- You must receive some benefit for your business by eating a meal out and paying for food and drinks. For example, you expect to receive a benefit such as signing a new client or creating a contract for a new project with an existing client. The purpose of the meal must be business-related to claim a deduction as well, which means you and those you dine with should spend most of the meal discussing business. This prevents abuses of the deduction such as going out to eat with friends, talking about business for a few minutes, and claiming the 50 percent deduction for it.
- You must provide proof that the meal was for business purposes only. If requested by the IRS, you must be able to establish how much you spent, the name of the restaurant and date of the meal, the business relationship of those dining together, and the purpose of meeting together for business over a meal.
Guidelines for Deducting Food and Beverages Purchased at an Entertainment Event
Sometimes purchasing food and drinks for yourself or a client takes place at an entertainment venue and not at a traditional restaurant. The IRS anticipated this issue and made a special provision for it. You can still take the 50 percent deduction if you purchased and consumed the food and/or beverage during the event or shortly before or after it. You will also need to submit proof of the expense separate from the event itself.
Another change to be aware of is on-site meals provided for the convenience of an employer such as ordering multiple pizzas for employees attending a business meeting over the lunch hour. You could deduct 100 percent of the cost of this expense prior to the TCJA. It’s currently 50 percent and will not be available after 2025.
Need greater clarification on how tax law changes affect your small business? Schedule a consultation with Chicagoland CPAs today.