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Meal Expenses: When Are they Deductible?

The Tax Cuts and Jobs Act made changes to deductions for meals. In fact, it eliminated the deduction for any expenses related to activities that used to be considered entertainment, amusement or recreation.

But you will be glad to hear that you may continue to deduct 50 percent of the cost of business meals — and here are the provisions:

Keep in mind that meals provided to employees of the business are handled by a different set of rules and are often fully deductible.

Note that prior to 2018, a business could deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business.

For further guidance, you should read IRS Notice 2018-76. For example, it explains in detail the concept of “entertainment,” which may seem intuitive, but isn’t. The Notice says that “entertainment” does not include activities which, although satisfying personal, living or family needs of an individual, are clearly not regarded as constituting entertainment. These activities might be reimbursed by an employer to an employee, or might include a hotel room maintained by an employer for lodging of employees while in business travel status.

However, if a business provides a hotel room or an automobile to an employee who is on vacation, that would constitute entertainment of the employee.

Do not try to get around the “separation” guidance — the IRS is strict here. The Notice gives an example of entertaining clients in a luxury suite at a basketball game. The cost of the tickets and suite is entertainment and not deductible. If the food provided in the suite is included in the suite rental and is not separated out, it is not deductible either.

However, if the invoice does separate out the cost of the food, it will be deductible to the extent allowed.

This is not an invitation to manipulate an invoice so it puts a disproportionate amount of money into the “food” column. The Notice also specifically warns businesses against trying to circumvent the entertainment disallowance rule by inflating the amount charged for food and beverages.

The IRS continues to issue additional guidance providing clarification of when business meal expenses may be deducted, with the latest guidance issued in February of 2020 – REG-100814-19.

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