A recent Wall Street Journal poll showed that some businesses have engaged in fewer client meals and invested in fewer entertainment events over the last year—falling some 70%. There is a definite shift in how businesses apply resources around client acquisition, and the reason may be simpler than you think.
Before the Tax Cuts and Jobs Act of 2017 (TCJA), meals and entertainment expenses were 50% deductible with some limited exceptions. TCJA made major changes of which all businesses should be aware.
First, entertainment expenses are now entirely nondeductible. In fact, entertainment-related meals only provide a tax benefit if both the meals and the entertainment are itemized and billed separately, otherwise the entire expense is nondeductible. This affects everything from purchasing tickets or boxes at sporting events, to rounds of golf, to a night at the theater.
For employers, providing certain meal-based benefits no longer yields the same tax benefit. While snacks provided to employees and meals provided for the benefit of the employer used to be 100% deductible, TCJA downgraded these expenses to 50% deductible through 2025. After 2025, no tax deduction will exist for these expenses.
While the TCJA changes discourage spending on meals and entertainment expenses, don’t let it stop you! Here are a few tips to maximize your business meals expense and keep your books ready for IRS examination:
- Update your trial balance to separate meals and entertainment expenses. In prior years, grouping meals and entertainment together made sense since they were treated similarly. Due to the changes under TCJA you now need the ability to separate meals from entertainment expenses. To maximize your historical data, we suggest creating two sub-accounts (one for meals and one for entertainment) under your historical Meals and Entertainment Expense trial balance account.
- Ensure expenses are “ordinary and necessary.” The focus of IRS scrutiny in this area relates to what they may deem as lavish or excessive expenses claimed.
- Ensure expense are “directly related to” or “associated with doing business.” Simply claiming that an expense is “necessary” does not guarantee a deduction.
- Ensure your substantiation is audit ready. Claiming deductions for business meals will be scrutinized more than ever under TCJA. The best defense is to be proactive with your recordkeeping. Keep well documented receipts! Write who was at the meal, what business was addressed, etc. on the back of the receipt. Be sure your calendar collaborates as a secondary contemporaneous record of your deductible business meal expenses.
Keeping track of the changes in the Internal Revenue Code that resulted from the TCJA can be confusing. Contact The Tax Warriors® if you have questions regarding your meals and entertainment expenses. We are always prepared to help maximize your deductions.
As with any article that discusses tax treatment, the usual disclaimers apply: This is a generalized overview, does not represent advice, and may not apply to your situation. Do not use this article to make tax or investment decisions. Consult your tax expert or call us to be that expert.