Update on IRS Rules for Meals and Entertainment

ACEC News / Business Management

February 13, 2020

Update on IRS Rules for Meals and Entertainment

By Michael Baker

The rules related to tax deductions for meals and entertainment changed after the Tax Cuts and Jobs Act (TCJA) of 2017. But taxpayers can still claim deductions for some of these expenses.

Beginning in 2018, no deduction was allowed for entertaining clients, employees or referral sources. Most business meals remain 50 percent deductible. One often overlooked exception is office-wide parties or picnics for employees, which are 100 percent deductible.

Confused?

Take a look at the chart below.

 

Chew on This

 

There is currently a 50 percent deduction for client-related business meals. If you want to get the deduction, you need to follow these rules:

• The taxpayer (or employee) must be present. That means you cannot send clients out unaccompanied, pick up the tab and qualify for deduction.
• Food and beverages must be purchased separately from entertainment, or be separated on the invoice. Remember, entertainment is not deductible.
• Meals cannot be lavish or extravagant. If the meal is considered extravagant, it would not be deductible as entertainment. As you can imagine, there may be a difference between your view of extravagant and that of the IRS.

There must be a business purpose or perceived benefit to the business from the meal, for example, a dinner with a client, vendor or service provider.

We recommend setting up three separate expense accounts to correctly categorize your business expenses: (1) entertainment, which is not deductible, (2) employee business meals and those for convenience of the employer, which are 50 percent deductible, and (3) employee parties/social events, which are 100 percent deductible.

Get the App

If you or your employees find it challenging to manage receipts and expense reports, consider expense management software like Certify or Expensify. Both have mobile apps that let you snap a photo of a receipt and create expense reports automatically. They also allow you to download credit card activity. In an IRS audit, documentation often wins the day. These applications provide structure and consistency for documenting reimbursable business expenses.

Michael Baker is managing partner of Dent Moses LLP, an accounting firm in Birmingham, Ala.

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