Clarifying Tax Deductions for Meals and Entertainment
Despite some initial confusion and dismay when the 2017 tax law was first passed, the IRS has confirmed that businesses can continue to write off 50% of the cost of food and beverages provided to current or potential clients, customers, consultants, or similar business contacts. However, the deduction for entertainment expenses — such as golf outings, cruises, concerts, and sporting events — has been eliminated.
Businesses can deduct 50% of the cost of food and beverage expenses paid or incurred during the taxable year for the operation of any trade or business. This includes meals for clients, but only if the taxpayer (or an employee of the taxpayer) is present, and the cost of food or beverages is not lavish or extravagant.
Client meals that are provided before, during, or after entertainment events may also be deductible, but food and beverage costs must be stated separately from any nondeductible costs (such as tickets) on the invoice. The IRS has also warned that the amount charged for food and beverages may not be inflated to circumvent the entertainment disallowance.
Away from the office, employers can deduct 50% of the cost of employee restaurant meals if business is discussed. This 50% limit applies whenever meals are provided for the convenience of the employer — for example, when employees travel for work or otherwise need to be available for business reasons throughout the mealtime.
Meals provided to employees on the employer’s premises are generally 100% deductible, such as lunch ordered for a staff meeting or dinner for employees working overtime. And employers can fully deduct the cost of meals and expenses for recreational or social activities that benefit employees, such as a summer picnic or annual holiday party, regardless of where the event is held.
The IRS tends to scrutinize such deductions closely, and if they are challenged, your food and beverage expenses could be disallowed unless you have records that satisfy certain statutory and regulatory requirements. Make sure to note the business reason for food and beverage expenses and keep all itemized invoices, credit card receipts, and other written records that show dates and amounts paid.