The tax status of a business meal with a client has been a perplexing problem for companies and their tax pros since last year’s Tax Cuts and Jobs Act took effect.
Deductible? Not allowed? Partially taxed?
It’s been clear that businesses no longer can deduct 50 per cent of entertainment expenses bought for clients – tickets to events, golf outings, fishing trips, night clubs, hotel stays, etc. – even if they are business-related. But, in the words of the Internal Revenue Service, “the Act does not specifically address the deductibility of expenses for business meals.”
Well, in October, the IRS finally filled in that blank. Yes, businesses still can write off half of the costs of meals and food/beverages connected to legitimate business dealings, the IRS clarified. That assumes the tab is not “lavish or extravagant under the circumstances,” and a company employee is involved, of course.
At the same time, the “how” is important. Businesses must keep meal or other food billings separate. An employee cannot lump entertainment and food expenses together, as might have happened in the past (Both were 50 percent deductible). He/she can’t take client to a basketball game or the theater and mix snack expenses along with ticket costs. For example, food included as part of a ticket package to a skybox at a stadium is not deductible.
The IRS says any food/ beverage costs must be stated on separate receipts. So, while the admission ticket to a game is not deductible at all, the company can deduct 50 percent of a hot dog or drink at the stadium, if its employee obtains a receipt at the cash register.
For a more common meal – say, discussing business with a client over dinner at a local restaurant – the IRS guidance clearly allows the 50 percent deduction.
For a fuller discussion, check IRS Notice 2018-76, which delves deeper into definitions of “entertainment.” And, this isn’t the final word yet. The agency announced that it intends to issue more guidance in the future.
Of course, we at EricJohn Ltd. can provide more specific guidance tailored to your situation as you wrap up your 2018 tax year.