Is There Such Thing as a Free Meal?
By David Kaplan, CPA
As it has been over a year since the Tax Cuts and Jobs Act passed, paving the way for the biggest tax reform since 1986, taxpayers are now seeing the impacts on their 2018 tax returns this filing season. One of the changes that has gone under the radar is how business meals and entertainment expenses are being treated.
The most significant change that was made on this topic is that entertainment expenses are no longer deductible if incurred or paid after December 31, 2017. Previously, you could deduct 50% of entertainment, amusement, or recreation expenses if they were directly related to the business or involved business discussions, constituting activities such as attending night clubs, country clubs, golf and athletic clubs and sporting events. Most taxpayers would have one account on their general ledger to keep track of both meals and entertainment, as both were eligible for the same deduction. However, since entertainment expenses are no longer deductible, it will be important for taxpayers to keep track of business meals and business entertainment separately. The only exceptions are when the entertainment activity is for employee recreational or social activities (discussed more later), or is a necessary part of the ordinary course of business. For example, if you’re in the business of being a movie or theater critic, then the expense of going to see those performances would not be considered entertainment, and would be fully deductible.
The rules for business meals did not have a significant change, but there are still things to be aware of:
- The expense should be an ordinary and necessary expense for the business.
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer or an employee of the business is present at the meal.
- The meal is being provided to somebody connected to the business, whether a potential or current client, business contact, or other employees to discuss business.
- If the food and beverages are provided at an entertainment activity, then the food and beverage portion were purchased separately. For example: Purchasing a suite at a Carolina Panthers game to bring potential clients to that includes tickets and food would be non-deductible. However, if you purchase food and beverages separately at one of the stands, that purchase would qualify as a business meal.
These business meals remain 50% deductible on the tax return, as are the expenses when the employer is paying for an employee’s meals when traveling for the business.
If the business provides an employer-operated eating facility, such as a cafeteria, in order to provide meals to their employees, or if they provide meals for employees working occasional overtime (de minimis meals), those expenses had previously been fully deductible. Under the new tax law, those expenses are now only 50% deductible. As the law currently stands, these expenses will no longer be deductible after December 31, 2025.
There is an exception to all of these rules, as referenced earlier, when the expense is deemed an employee recreational or social expenditure. If the expense is made primarily for the benefit of employees other than highly compensated employees or individuals owning less than a 10% interest in the trade or business, then the expense is fully deductible. These are typically events that are open to all employees, though all employees don’t have to benefit, and the event has no business nature. Commonly, this would apply to a holiday party or annual picnic provided by the employer. In addition, if for example the business has 100 employees and you purchase 30 tickets to a sporting event for the employees’ benefit, and offer the tickets to all the employees on a first come first serve basis, this would also qualify to be fully deductible.
Moving forward, it will be important to readjust the mindset of business meals and entertainment to remember what is deductible and make sure to track them separately. Taxpayers will need to second guess the value of those entertainment expenses that will no longer be deductible on the tax return and remember that they will only receive a deduction for 50% of the business meals. But, feel free to add some extra employee social and recreational events, since those remain fully deductible!