Back in January, 2018, we reported on changes that the Tax Cuts and Jobs Act (TCJA) might make to the meals and entertainment deduction. “The biggest potential impact may come from client-related business meals that are not associated with entertainment,” we said. “It is still unclear as to how these types of expenses will be treated under the new tax reform.”
The IRS recently clarified this through its Notice 2018-76. While expenses for entertainment, amusement, and recreation are no longer deductible according to the TCJA, certain business meals are.
Not There Yet
While this is good news for you if your receipts for client meals are substantial, you still may not be absolutely clear on how to proceed when it comes to 2018 tax preparation. The Treasury Department and the IRS have yet to provide a definitive explanation of the difference between business meal expenses that are nondeductible entertainment expenses and those that are 50 percent deductible.
Until new regulations are issued, you can follow the guidelines set forth in Notice 2018-76. This means that you’re allowed to deduct 50 percent of business meals expenses if:
- They are “ordinary and necessary expenses” incurred as a function of carrying out your trade or business.
- They aren’t “lavish or extravagant.”
- The taxpayer (or an employee of his or hers) is present during the consuming of the food and beverages.
- A client or prospect is the recipient of the food and beverages.
- The food and beverages are purchased and/or documented separately on receipts or invoices.
Here’s one way the IRS explains the regulation. Let’s say you take a prospect or customer to a baseball game. The cost of the tickets would not be deductible. But if you buy hot dogs and nachos and drinks for your guest(s), 50 percent of those costs are deductible.
But let’s say you take a different group of business prospects to a basketball game where you’ll be entertaining them in a suite. The cost of food and beverages is included in the cost of the suite and isn’t invoiced separately. The IRS would consider the entire expenditure to be “entertainment,” and it would not be deductible.
Clear, But Not Finalized
Those examples are clear and easy to understand, and they are the most current clarification we have from the IRS. But the IRS and the Treasury Department are accepting comments on this topic until December 2, 2018. That doesn’t leave a lot of time before the end of the 2018 tax year.
You know how fast December zips by, and how busy you are in the last month of the calendar year. If you’re not already working with us on 2018 tax planning, we strongly suggest that you set some time aside for that soon. Contact us, and we can get started now.