The tax laws under The Tax Cuts and Jobs Act (TCJA) take effect for years after 2017 and make major changes for some common business expenses including meals and entertainment. Most entertainment expenses are no longer deductible after 2017 and questions remain about the deductibility of “business meals.”
Prior to TCJA deductible meals and entertainment had to meet the following criteria 1) be directly related to, or 2) be associated with the active conduct of the taxpayer’s trade or business or income-producing activity. The deduction for meals and entertainment was limited to 50% of the deductible amount.
Effective with TCJA for amounts incurred or paid after December 31, 2017, there is no deduction allowed for an activity that constitutes entertainment, amusement or recreation. This means those tickets to sporting events, private boxes, stadium license fees, golfing events and theater tickets are no longer deductible to name a few. Taking clients to these events will no longer be deductible as entertainment expenses.
The TCJA does provide, generally, the 50% deductibility for expenses for food and beverage for “business meals.”
In the past that meant a bona fide business discussion, negotiation or transaction such as goal setting or future developments between the taxpayer and client and took place at a restaurant for lunch or dinner. Also, the meal was not lavish or extravagant under the circumstances, the taxpayer or employee of the taxpayer was present at the meal and the expense was substantiated.
What the TCJA does not continue to include is the “directly related to” or “associated with” standards that used to apply to business meals. So now it is unclear what is required to constitute treatment as a “business meal.” So, when is a “business meal” deductible?
The committee report to the TCJA only declares “Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g. meals consumed by employees on work travel).”
The AICPA has taken the position that business meals that meet the above criteria are still allowed as deductions under Code Sec. 274(k). The AICPA has asked the IRS for immediate guidance and is still awaiting the IRS response. So, for now continue to substantiate all meals with business purpose, time and place, amount and who attended.
Now you ask, “What about meals provided to employees consumed on company premises?” The regulations here can get lengthy, so we will cut to the chase. Prior to TCJA Companies could deduct 100% of meals provided to employees for the convenience of the employer. Under TCJA meals provided to employees are now subject to the 50% limit on deduction for meals.
Posted by Kim Gunther, CPA
