Order the Steak!
Most of us have heard of the Tax Cuts and Jobs Act (TCJA) that was passed in December of 2017. One of the changes that came with the TCJA was how businesses treat travel, business meals, and entertainment.
At the time, the language of the law created confusion. Under the prior law, a business could deduct 50% of entertainment related to the business, while under the new law, that deduction no longer exists. The confusion comes with the definition of entertainment per Section 1.274-2(b)(1)(i), which states that entertainment is “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family.” Whether providing food and beverages constitutes entertainment is where things get tricky. Under the prior law, meals were generally deductible at 50%, but with the entertainment deduction gone, many questioned what that meant for meals.
The IRS will be publishing proposed regulations to clarify what meals are 50% deductible, but until then the taxpayers can look to guidance issued in Notice 2018-76, which allows taxpayers to continue to deduct 50% of meals if:
- They are ordinary and necessary to carry on the business or trade.
- The expense is not lavish or extravagant.
- The taxpayer or an employee is present for the food/beverages.
- The food and beverages are provided to a current or potential customer, client, consultant, or business contact.
- In the event that food and beverages are provided at an entertainment event, the food and beverages must be purchased separately from the entertainment or stated separately on the bill.
With future guidance on the way and further changes possible after midterm elections it is important to stay informed. My advice to business owners is to:
- Pay Attention: Changes to the law and guidance are coming and can have consequences. Don’t let these changes surprise you.
- Find a Trusted Tax Advisor: You spend your time running a business and generating profit. Keeping an eye on the news for changes is important, but having a trusted advisor can allow you to focus on the business while they update you on changes.
- Keep Great Records: This is more important this year than in previous years. In addition to keeping receipts, it may be good to take note of who you met with, dates, and the purpose of the meeting.
As always, please feel free to contact Elias Strauss CPAs, LLC with any questions and we would be happy to be a resource to you.