Tax reform has had a significant impact on the tax deductions you can now claim for business entertainment and meals.
The new tax law also eliminated business deductions for entertainment. As a result, no deduction is allowed with respect to: (1) an activity generally considered to be entertainment, amusement or recreation; (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items. Under prior law, there was an exception to this rule for entertainment, amusement, or recreation directly related to (or, in certain cases, associated with) the active conduct of a trade or business. This is no longer the case.
The chart below shows you how the Tax Cuts and Jobs Act treats 12 meal and/or entertainment events.
|Meals with clients and prospects||X|
|Entertainment with clients and prospects||X|
|Employee meals for convenience of employer||X|
|Employee meals for required business meeting||X|
|Meal served at Chamber of Commerce meeting||X|
|Meals while traveling away from home overnight||X|
|Year-end party for employees and spouses||X|
|Golf outing for all employees and spouses||X|
|Year-end party for customers||X|
|Meals for general public at marketing presentation||X|
|Team-building recreational event for all employees||X|
|Golf, theater, or football game with your best customer||X|
In Notice 2018-76, the IRS states that client and prospect business meals continue as tax deductions under the Tax Cuts and Jobs Act.
This is very good news indeed.
Under this new IRS guidance, you may deduct 50 percent of your client and prospect business meals if
- the expense is an ordinary and necessary expense under Internal Revenue Code (IRC) Section 162(a) that is paid or incurred during the taxable year in carrying on any trade or business;
- the expense is not lavish or extravagant under the circumstances;
- the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- the food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- 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.
To prove your business meals, follow the two easy steps below:
- Keep the receipt that shows the name of the restaurant, the number of people at the table, and an itemized list of food and drinks consumed.
- On the receipt, record the name or names of the person or persons with whom you had the meal and also record the business reason for the meal.
In the event that the receipt is not available, such as with the purchase of hot dogs and drinks at a baseball game while sitting in the stands, make sure to make a written note of the expenditures immediately after the game.
If you charge a business meal to a credit card, the credit card statement provides your proof of payment. When possible, always pay by credit card or write a check so that you have clear proof of payment.
Proof of payment is not proof of what you purchased, so in addition to proof of payment, keep the receipt with the notations as described earlier. With this combination of proof of payment and receipt with notations, you have what we call audit-proof documentation.