We often come across receipts for business meals that do not meet the criteria for deductibility provided by the IRS. Furthermore, the new law disallows some previously deductible expenses, and redefines others. With the passing of the Tax Cuts and Jobs Act, we feel this is a perfect opportunity to not only discuss the changes under the new law, but also revisit the requirements for meal expenses that have not changed.
Business-Related Meals
This particular subject is under debate throughout the professional world. We know under the new Tax Cuts and Jobs Act any activity that is “generally considered” to be entertainment is not deductible, and the provision of food and drink can be considered entertainment. However, many business owners incur meal expenses with potential or current clients for the purpose of growing their business. Are these meals deductible?
Unfortunately, we simply do not have information from the IRS to say with any certainty that these meals are or are not deductible. The AICPA has formally requested that immediate guidance be released from the IRS clarifying the deductibility of these meals. Until that time we can only advise business owners to keep such meals to a minimum and to keep detailed records of these situations. We strongly advise to always retain the following documentation:
We cannot stress enough, that without further guidance and clarification from the IRS, we are unable to determine the deductibility of these types of business meals. Please consider the possibility that these meals may be disallowed, and plan business engagements accordingly.
Travel Meals
Meal expenses incurred while traveling for business will remain 50% deductible. However, it is important to understand what constitutes travel, and what will not be allowed by the IRS. The IRS defines travel as being away from “the general area of your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of work while away.” Generally, this assumes an overnight stay is required to conduct your business. The following examples are not considered to constitute travel under the definition provided by the IRS:
Food and Beverages for Employees and/or the Public
Prior to the passing of the Tax Cuts and Jobs Act, businesses were allowed a 100% deduction for the cost of food and beverages made available to employees and/or the public, e.g., coffee, doughnuts, soda, and other snacks. However, under the new law, these expenses are limited to only 50% deductibility.
Example. XYZ Company has a break room and kitchen at their facility for the use of its employees. XYZ stocks the breakroom with water, soft drinks, and condiments which the employees are allowed to consume during the day. The amounts paid for these items are not considered entertainment expenses, however, the 50% deduction limit will apply.
Employee Business Meetings
The deductibility of employee meetings involves understanding the nature of the meeting. If the nature and intent of the meeting is to discuss procedures, forecasts, prior year results, etc., and is primarily of a business nature, the expenses incurred will be fully deductible to the taxpayer. It is important to note that while this exception applies to bona fide business meetings (even though some social activity may be involved), it will not apply to meetings which are primarily for social or nonbusiness purposes.
Example. XYZ Construction holds a meeting at the beginning of every year to go over safety procedures and any new safety laws or requirements with all of their employees. The meeting is held in a meeting room at a local hotel, with lunch and refreshments provided throughout the day. The expenses incurred for this meeting will be fully deductible to XYZ Construction.
Example. Every profitable quarter XYZ Construction gathers all employees for lunch at a local restaurant to show their appreciation and briefly discuss new procedures. The meeting typically lasts an hour to an hour and a half and involves mostly social interaction between employees. The expense incurred for this meeting will be subject to the 50% deductibility restriction.
Recreational Expenses for Employees
One exception to the limitation of social or nonbusiness meetings is meals associated with recreational, social, or similar activities conducted primarily for the benefit of ALL EMPLOYEES (i.e. Christmas parties, company picnics). These expenses remain fully deductible and are not subject to the entertainment deduction denial or the 50% limitation. It is important to note that ALL employees must be invited to attend the event in order to be fully deductible.
Example. XYZ Company holds an annual holiday party which is attended by all of its employees. The expenses related to this party are fully deductible to the business. However, if instead of inviting all employees, only the managers of the company are invited to attend the party, the expenditure will not be protected by this special rule and the expenses will be nondeductible.
Business-Related Meals
This particular subject is under debate throughout the professional world. We know under the new Tax Cuts and Jobs Act any activity that is “generally considered” to be entertainment is not deductible, and the provision of food and drink can be considered entertainment. However, many business owners incur meal expenses with potential or current clients for the purpose of growing their business. Are these meals deductible?
Unfortunately, we simply do not have information from the IRS to say with any certainty that these meals are or are not deductible. The AICPA has formally requested that immediate guidance be released from the IRS clarifying the deductibility of these meals. Until that time we can only advise business owners to keep such meals to a minimum and to keep detailed records of these situations. We strongly advise to always retain the following documentation:
- Receipt from the meal in question
- Date, time, and location of the meal
- Summary of topics discussed and names of those present should be written on EACH receipt, and
- Whether the other party in attendance is a current/potential client or customer
We cannot stress enough, that without further guidance and clarification from the IRS, we are unable to determine the deductibility of these types of business meals. Please consider the possibility that these meals may be disallowed, and plan business engagements accordingly.
Travel Meals
Meal expenses incurred while traveling for business will remain 50% deductible. However, it is important to understand what constitutes travel, and what will not be allowed by the IRS. The IRS defines travel as being away from “the general area of your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of work while away.” Generally, this assumes an overnight stay is required to conduct your business. The following examples are not considered to constitute travel under the definition provided by the IRS:
- Meals consumed during an ordinary work day
- Stopping for a meal between jobs or meetings within your local area
Food and Beverages for Employees and/or the Public
Prior to the passing of the Tax Cuts and Jobs Act, businesses were allowed a 100% deduction for the cost of food and beverages made available to employees and/or the public, e.g., coffee, doughnuts, soda, and other snacks. However, under the new law, these expenses are limited to only 50% deductibility.
Example. XYZ Company has a break room and kitchen at their facility for the use of its employees. XYZ stocks the breakroom with water, soft drinks, and condiments which the employees are allowed to consume during the day. The amounts paid for these items are not considered entertainment expenses, however, the 50% deduction limit will apply.
Employee Business Meetings
The deductibility of employee meetings involves understanding the nature of the meeting. If the nature and intent of the meeting is to discuss procedures, forecasts, prior year results, etc., and is primarily of a business nature, the expenses incurred will be fully deductible to the taxpayer. It is important to note that while this exception applies to bona fide business meetings (even though some social activity may be involved), it will not apply to meetings which are primarily for social or nonbusiness purposes.
Example. XYZ Construction holds a meeting at the beginning of every year to go over safety procedures and any new safety laws or requirements with all of their employees. The meeting is held in a meeting room at a local hotel, with lunch and refreshments provided throughout the day. The expenses incurred for this meeting will be fully deductible to XYZ Construction.
Example. Every profitable quarter XYZ Construction gathers all employees for lunch at a local restaurant to show their appreciation and briefly discuss new procedures. The meeting typically lasts an hour to an hour and a half and involves mostly social interaction between employees. The expense incurred for this meeting will be subject to the 50% deductibility restriction.
Recreational Expenses for Employees
One exception to the limitation of social or nonbusiness meetings is meals associated with recreational, social, or similar activities conducted primarily for the benefit of ALL EMPLOYEES (i.e. Christmas parties, company picnics). These expenses remain fully deductible and are not subject to the entertainment deduction denial or the 50% limitation. It is important to note that ALL employees must be invited to attend the event in order to be fully deductible.
Example. XYZ Company holds an annual holiday party which is attended by all of its employees. The expenses related to this party are fully deductible to the business. However, if instead of inviting all employees, only the managers of the company are invited to attend the party, the expenditure will not be protected by this special rule and the expenses will be nondeductible.
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