With great fanfare, the Tax Cuts and Jobs Act had eliminated deductions for business entertainment expenses, with much dismay from taxpayers. Prior to the TCJA, you could deduct 50% of the cost of qualified business entertainment (meals & tickets) as long as you met strict substantiation requirements spelled out in IRS regulations. This covered entertainment that was “directly-related to” or “associated with” the business. Frequently, the cost of meals and beverages was included in such entertainment.
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But in 2018, the TCJA repealed the deduction for business entertainment.
Luckily, meals that were incurred while traveling away from home on business, such as a business trip to finalize a contract with a client, remained 50% deductible.
The rules/regulations for meals incurred in connection with entertainment were not as clear and concise. Fortunately, the IRS has provided some leeway and mentions that taxpayers may deduct 50% of the cost of business meals if:
- The expense is an ordinary and necessary business expense paid or incurred during the tax year
- The expense is not lavish or extravagant under the circumstances
- The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact
For food and beverages provided during or at an entertainment activity, they 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.
Here are some examples, provided by the IRS:
To illustrate the new rules, the Notice provides three examples where business taxpayers attended games with business contacts.
Example 1: A taxpayer takes a customer to a baseball game and buys the hot dogs and drinks. The tickets are "non-deductible" entertainment, but the taxpayer can deduct 50 percent of the cost of the hot dogs and drinks purchased separately.
Example 2: A taxpayer takes a customer to a basketball game in a luxury suite. During the game, they have access to food and beverages, which are included in the cost of the tickets. Both the cost of the tickets and the food and beverages are "non-deductible" entertainment.
Example 3: A taxpayer takes a customer to a basketball game in a luxury suite, same as in example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. In this case, the taxpayer can deduct 50 percent of the cost of the food and beverages.