Accounting Rules for Meals and Entertainment Deduction

In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. As you’re reviewing business expenses, you might be wondering what you can deduct on your tax return for these expenses. Accounting rules for meals and entertainment changed under the Tax Cuts and Jobs Act (TCJA). However, you can still claim some valuable write-offs.

No More Entertainment Deductions

One of the biggest changes to the accounting rules for meals and entertainment deduction is specifically the entertainment portion. Beginning in 2018, the TCJA disallows deductions for entertainment expenses.  This includes sports events, theater productions, golf outings and fishing trips.

Meal Deductions Still Allowed

You can still deduct 50% of the cost of food and beverages for meals conducted with business associates. However, when keeping tax records you need to follow three basic rules. These guidelines will help prove that your expenses are relating to business:

  1. The expenses must be “ordinary and necessary” in carrying on your business.
    This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
  2. The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
  3. You must be able to substantiate the expenses. The accounting rules for meals and entertainment requires proof that the meal and beverage expenses qualify for a deduction. You must be able to:
    – Establish the amount spent.
    – The date and place where the meals took place.
    – The business purpose and the business relationship of the people involved.

Set up detailed record keeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.

Other Considerations

What if you spend money on food and beverages at an entertainment event? The IRS states in guidance (Notice 2018-76) that taxpayers can still deduct 50% of their incurring food and drink expenses at entertainment events. However, according to accounting rules for meals and entertainment this is only applicable for conducting business. In addition, conducting business must be during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.

Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these providing meals to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, providing meals for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.

Plan Ahead

As you can see, accounting rules for meals and entertainment expenses became more complicated after the TCJA. Your tax advisor can keep you up to speed on the issues and suggest strategies to get the biggest tax-saving bang for your business meal bucks.

© 2019