Aug 02, 2019

Since the enactment of the “Tax Cuts and Jobs Act”, think Trump Tax Bill, where are we on the deduction of meals?

While it was made clear that meals incurred while traveling away from home on business, such as a business trip to finalize a contract with a client, remains deductible, subject to the 50 percent limit, meals outside that narrow interpretation remained murky.

Fortunately, to add clarity and not relief, IRS has provided some leeway. In the 2018 Notice, it says that taxpayers may deduct 50 percent of the cost of business meals if:

  • The expense is an ordinary and necessary business expense paid or incurred during the tax year
  • The expense is not lavish or extravagant under the circumstances
  • The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished
  • The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact

For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

Caution: The rules can’t be circumvented by inflating amounts charged for food and beverages in connection with entertainment activities.

To illustrate the new rules, the Notice provides three examples where business taxpayers attended games with business contacts.

Example 1: A taxpayer takes a customer to a baseball game and buys the hot dogs and drinks. The tickets are nondeductible entertainment, but the taxpayer can deduct 50 percent of the cost of the hot dogs and drinks purchased separately.

Example 2: A taxpayer takes a customer to a basketball game in a luxury suite. During the game, they have access to food and beverages, which are included in the cost of the tickets. Both the cost of the tickets and the food and beverages are nondeductible entertainment.

Example 3: The same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. In this case, the taxpayer can deduct 50 percent of the cost of the food and beverages.

The IRS is expected to issue new regulations with more details. In the meantime, you can rely on the 2018 Notice.

~ Credit to the and Ken Berry Esq.