On August 29, 2018, we posted a “Meals & Entertainment Update“ to our initial article on “Meals & Entertainment Under Tax Reform.” That update expressed encouragement that the legislative intent was to leave the 50% client, prospect and other business-related meals deduction intact. We have good news to report.
On October 3, 2018, the IRS issued guidance on the business expense deduction for business meals following law changes in the Tax Cuts and Jobs Act (TCJA).
Under this interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when 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 when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they 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.
To substantiate your business meals, follow these two steps:
- Retain the receipt that shows the name of the restaurant and an itemized list of the food and drinks consumed;
- On the receipt, record the name(s) of the person(s) with whom you had the meal and also record the business purpose of the meal.
In the event that the receipt is not available, such as with the purchase of hot dogs and drinks at a ball game while sitting in the stands, make a written note of the expenditures immediately after the game. This kind of meal would ordinarily be treated as entertainment which is no longer deductible, so remember to discuss substantive business while watching the Rangers lose. 🙂
If you do incur any expenses for entertainment, please break that category out as a separate account on your books. Unfortunately, entertainment is non-deductible starting in 2018 with the new tax law.
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.
The IRS expects to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment. Until the proposed regulations are effective, taxpayers can rely on guidance in Notice 2018-76.
Helpful links of Tax Reform’s Meal & Entertainment changes:
