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Deducting Entertainment Expenses

The Tax Cuts and Jobs Act (TCJA) changed many of the rules regarding small businesses. Today we’d like to look at some of the changes to qualified deductions for meals and entertainment expenses. Under the previous regulations, 50% of any form of client entertainment costs could be deducted; this included concert tickets, golf outings, sports events, and other ways of entertaining clients, including meals. The TCJA has ended the deduction for entertaining clients with tickets or outings, but one area that remained unclear was the deductibility of business meals. However, with the recently issued clarifications from the IRS, we hope to summarize the changes.

50% of business meal expenses with customers/clients are deductible under the following conditions:

  • The expense is ordinary and necessary and paid or incurred during the tax year.

  • It is not lavish or extravagant.

  • The taxpayer, or an employee of the taxpayer, must be present during the meal.

  • The meal is provided to a current or potential business customer or contact.

  • If the food or beverage is providing during an entertainment activity, the cost of the meal must be separated from the cost of the entertainment.

  • Transportation to and from the location where the meal is being held is deductible.

The following entertainment expenses spent on prospective or current customers/clients are longer deductible:

  • Concert or theater tickets (including stadium or arena suites or boxes), sporting events, outings to country clubs, movies, and amusement parks, even if business is discussed during the outing.

  • A meal with a client/customer can never be deducted unless there is a clear business purpose.

  • A meal for a client/customer can never be deducted if the taxpayer or an employee of the taxpayer is not present.

100% of business meal expenses are deductible if the following circumstances apply:

  • An employer can deduct the full amount for food and beverage when it is provided to employees who are working overtime or for food provided during a staff meeting.

  • Any activity, including meals, that is held as a benefit for employees can be fully deducted. For example, an annual holiday party or other outing.

  • It is important to note that only 50% of a meal expense is deductible for a business lunch with co-workers or employees where business is discussed.

If during the course of your business, you have been accustomed to providing entertainment and meals to your clients/customers or business associates, it becomes more important than ever to have excellent record keeping. Be sure to keep all your receipts and note the date, type of expense, those who were with you, and a brief note about the business topic that was discussed. As always, consulting with a qualified tax professional when you have questions keeps you on the right side of the rules.

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