Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.
Under the new law, for amounts paid or incurred after December 31, 2017, the deduction for business-related entertainment, amusement, or recreation are disallowed completely. However, the Tax Cuts and Jobs Act did not specifically address the deductibility of business meals.
On Wednesday, October 3, 2018, the Internal Revenue Service released guidance on the business expense deduction for meals and entertainment. Notice 2018-76 provides transitional guidance on the deductibility of expenses for business meals. Under this notice, taxpayers may deduct 50% of business meal expenses if:
- The expense is an ordinary and necessary expense 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.
The Notice also announces that the IRS and Department of Treasury intend to publish proposed regulations that will include guidance to further clarify the treatment of business meal and entertainment expenses. Until those regulations are issued, taxpayers can rely on the guidance in Notice 2018-76.
This Notice helps put an end to speculation and confusion regarding the deductibility of business meals. As long as you follow the requirements for documenting business meals, you may continue to deduct 50% of the expenses! Contact your Alerding CPA Group representative with any questions at 317-569-4181 or visit www.alerdingcpagroup.com.
This post was written by:
David W. Garrett, CPA, CGMA
As a Director at Alerding CPA Group, Dave oversees our tax practice while also providing tax advice, planning, support and compliance services for closely-held businesses and their owners. He has over 25 years of public accounting experience focusing primarily in serving closely-held companies with accounting, corporate structure, financing, taxation and operational issues.
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