Under the recently enacted Tax Cuts and Jobs Act (TCJA), there has been a crackdown on which meal and entertainment expenses are tax deductible. Under the previous law, 50% of all business-related meal and entertainment expenses were tax deductible at the end of the year, but the TCJA has cut this discount down to solely meal related expenses. This change initially caused confusion, but a recent notice sent out by the IRS was able to make light of the new rules. In order to make to proper deductions and fully utilize the law for your business, it is important to understand the rules of what can be deducted and how to record it.
The most important part of getting the full deduction for your business is making sure to obtain receipts that denote separate charges for food bought in connection with entertainment. In addition to this, it is important to follow the rules regarding the actual cost of the meal and the people present at the meal. Such considerations include ensuring that the meal is an ordinary and necessary business expense, the cost is not extravagant under the circumstances, the taxpayer or their employee is present, and that meal is provided to current or potential clients or business partners. This means you cannot inflate the cost of the meal if it is provided concurrently with entertainment.
One common business practice that can be used as an example of how this new law works is when a company brings a potential client or partner to a sports game. Depending on the size of the company, it is not uncommon for these meetings to take place in a luxury box. In such a situation, the food provided is often included in the original price of the box. In this case, the company would not be able to deduct 50% of the expense, as there is no discernable difference between the entertainment and meal. However, if a company hosts a client or partner in the normal seating area, where food is purchased at a concession stand as has a stated price, or the invoice for the luxury box state the total food cost, the host would be able to pay for the food and add to their deductions. So, remember, when deciding on entertainment and food used to attract people to your business, make sure to consider what whether each cost can be considered separate and how you can increase your deductible.