IRS Clarifies Rules on Deductible Business Meals

• October 24, 2018
• Amanda Garnett

Earlier this year, we discussed how entertainment expenses are no longer be deductible as a result of tax reform.  This includes sports tickets, theater tickets, hunting trips, and certain other outings where financial institutions connect with their customers.

Because of the change to entertainment expenses, there has been a lot of debate in the tax community regarding whether business meals before, during, or after entertainment are tax deductible. The IRS recently clarified this issue.

Meals Before, During, or After Entertainment

The IRS has released interim guidance on when meals that are closely associated with entertainment will be tax deductible.  Under the new guidance, a taxpayer may deduct 50% of the cost of a business meal if:

1. The expense is an ordinary and necessary expense;
2. The expense is not lavish or extravagant under the circumstances;
3. An owner or employee of the business is present at the meal;
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and,
5. If the food and beverages are provided during or at an entertainment activity, the food and beverages are purchased separately from the cost of the entertainment.

As we previously discussed, there are special rules related to the deductibility of other types of business meals not connected with entertainment, companies should also review these rules in connection with 2018 tax planning.

Example Situations to Consider

While at a ballgame, the company buys hot dogs and drinks for employees and customers.  The hot dogs and drinks are purchased separately from the game tickets.  In this case, the company may deduct 50% of the cost of the meal.

In contrast, what if the employees and customers attend a game in a suite where they have access to food?  The cost of the tickets as shown on the invoice includes the food.  In this case, the entire cost is considered entertainment and is not tax deductible.

If instead of including the cost of the food in the total invoice price the stadium separately listed the cost of the food on the invoice, the amount paid for the food would be 50% deductible while the ticket price would not be tax deductible.

Recordkeeping

We recommend that financial institutions set up several different general ledger accounts to ensure that their meals and entertainment related expenses are adequately tracked for tax purposes.  At a minimum, we would recommend separately tracking:

• Non-Deductible Entertainment Expenses
• 50% Deductible Business Meals
• 100% Deductible Business Meals

Documentation should also be maintained regarding the business purpose of each meal, who attended from the company, and which customers were in attendance to ensure there is adequate support in place in case of a future IRS audit.

Next Steps

Navigating the changes resulting from tax reform is complex.  CLA is here to help.  Please contact us.

Tags: tax, tax reform, Tax Reform | 1 Comment »