Business Over Dinner? It May Be Delicious, But Is It Deductible?

The Internal Revenue Service on Wednesday (Feb. 26) came out with new regulation to “provide guidance” about business meals and related tax deductions. Basically, the tax agency is issuing its  interpretations of the federal Tax Cuts and Jobs Act from 2017 that cut out some deductions — most notably, the tax breaks for entertainment expenses.

But, although those disappeared at the end of 2017, company owners and their employees still can deduct part of the costs of true business meals. For example, if a sales representative takes a potential client out to dinner for business reasons, the company can deduct half (50%) of the meal’s cost. However, they can’t get outrageous. The IRS rule says the deduction is okay if the “expense is not lavish or extravagant under the circumstances.”

Employees are considered to be business associates, so the company can deduct their meal costs while traveling for business at the 50 percent rate. 

Then, there also are some common situations when a business owner can write off the whole cost of food for employees.   For example, any food and drinks offered free of charge to the general public are 100 percent deductible. A company-wide party or lunch also qualifies. And, as you might suspect, if the business provides meals as part of employee’s taxable pay, then the business can take the deduction.

 A couple of years ago, an IRS ruling verified a full deduction for food expenses in business presentations involving the general public.  A real estate agent showing a house, for example, can write off the costs of cookies, hors d’oeuvres or even wine as legitimate business expenses.  The key is that the food must be available to the public as part of the open house.

Likewise, a financial adviser who hosts clients for a business presentation also can enjoy the full deduction at tax time. Both are considered business expenses, the Bradford Tax Institute noted. One main requirement in both cases is that all the clients are outside business prospects. They can’t be relatives, co-workers or “an exclusive list of guests,” as the IRS rule says.

The public can comment on the proposed regulation, called “Meals and Entertainment Expenses Under Section 274,” until April 13.  See https://www.federalregister.gov/documents/2020/02/26/2020-03723/meals-and-entertainment-expenses-under-section-274 .

Eric Buechler, owner of EricJohn Ltd. and an IRS-approved enrolled agent, commented on another common situation that was not directly covered in the new rules.  Employers can take a full (100 per cent) deduction for costs of food/beverages for employees at work meetings that are held in-house and are for the convenience of the employer, he said.   Eric who is an IRS-approved enrolled agent, can help small business owners deal with the details about deductions involving business meals.