Several changes to the rules for deducting meals and entertainment were made by the Tax Cuts and Jobs Act (TCJA).  Prior to the TCJA, meals and entertainment were either 100% or 50% deductible, depending on the nature of the expense.  For these same expenses paid or incurred after December 31, 2017, the deduction may have changed.

IRC Sec. 162(a) allows for a deduction for both ordinary and necessary business expenses paid or incurred during the tax year in carrying on any trade or business. Many have viewed meals and entertainment to be one and the same in classification, but in many ways they are not.

What is Entertainment?

While the deduction for entertainment expenses changed with the TCJA, the definition has not.  Entertainment expenses are defined as activities in night clubs, cocktail lounges, theaters, country clubs, golf and other sporting events, and other similar activities that relate only to the taxpayer and their family. These expenses also include personal, living, and family needs such as meals, lodging, and auto expenses that are used for a business customer and their family.

Entertainment expenses before the TCJA were generally deductible if and only if they met either of the following criteria:Tax Cuts
  1. Directly Related – The expense is directly related to the active conduct of the taxpayer’s trade or business, or
  2. Associated With – The item directly preceded or followed a substantial and bona fide business discussion.

The TCJA has now rendered most entertainment expenses nondeductible.

What are Meals?

Meals are defined as food or beverage expenses that are not lavish or extravagant, and either the taxpayer or employee is present at consumption. Most allowable meal expenses are deductible for 50% of the cost. However, there are some that can be considered for a full deduction if they meet certain criteria.

Allowable Deductions

Depending on the expense classification, an expense may be nondeductible, 50% deductible, or 100% deductible.

Entertainment expenses post TCJA are nondeductible, excluding the following exceptions.

Qualifying entertainment expenses may be 50% deductible if the expense is:
  1. Food and beverage for employees. Includes food and beverage on related facilities (restaurant or other food industry facility) or business premises.
  2. Directly related to business meetings of employees, stockholders, agents, or directors.
  3. Directly related to attending business meetings or conventions of any Section 501(c)(6) organization, such as business leagues or chambers of commerce.
  4. Entertainment sold to customers in a bona fide transaction for full consideration.
  5. Includible in income of persons who are not employees of the taxpayer.
Qualifying entertainment expenses may be 100% deductible if the expense is:
  1. A company social event or facility for employees such as picnics, holiday parties, and company golf outings.
  2. Included in either employee or nonemployee compensation.
  3. Reimbursed under an accountable plan.
  4. Made available to the public.
  5. Sold to customers.
For meal expenses that fit the criteria, the expense may remain nondeductible if:
  1. Meals are for members of commercial vessels required to be provided under federal law or on certain oil or gas platforms.
  2. Reimbursed moving expenses of an employee that are included in income.
  3. Meals associated with entertainment activities are non-separately stated.
  4. Personal, lavish, or extravagant in relation to the activity.
Qualifying meal expenses may be 50% nondeductible if:
  1. The expense is an ordinary and necessary expense under IRC Sec. 162(a) paid or incurred during the tax year in carrying on any trade or business.
  2. The expense is not lavish or extravagant under the circumstances.
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of food or beverages.
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact—this includes client/customer business meals, and business meeting meals.
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
  6. Business travel meals.
  7. De minimis food and beverages provided in the workplace. *
  8. Meals provided for the convenience of the employer. *
  9. Employer-operated eating facilities. *

* Due to recent changes by the TCJA (Tax Cuts and Jobs Act), the following expenses are now 50% deductible until 2025, previously fully deductible. After 2025, the meal criteria will effectively become nondeductible.

Qualifying meal expenses may be 100% nondeductible if the expense is:
  1. Included in either employee or nonemployee compensation.
  2. For recreational, social, or similar activities primarily for the benefit of employees.
  3. Reimbursed under an accountable plan.
  4. Made available to the public.
  5. Sold to customers.

If you have any questions about rules for business meals and entertainment, contact the professional at Gilliam Bell Moser LLP