By: Kevin R. Albaum
The Tax Cuts and Jobs Act of 2017 (“TCJA”) lowered tax rates for businesses. However, certain business deductions of the past were eliminated as well. This article will address entertainment expenses and business meals under TCJA.
Under TCJA, entertainment expenses incurred on and after January 1, 2018 became non-deductible (previously they were 50% deductible). That leads to the question…well what is considered entertainment to the IRS? The Internal Revenue Code (“The Code”) defines entertainment as follows:
“Entertainment” means any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family. The term entertainment may include an activity, the cost of which is claimed as a business expense by the taxpayer, which satisfies the personal, living, or family needs of any individual, such as providing food and beverages, a hotel suite, or an automobile to a business customer or his family.
The Code’s definition of entertainment was not changed in TCJA so the old definition remains in place. Note that the definition for entertainment includes “providing food and beverages”. This has led to confusion in the tax community as business meals have generally been 50% deductible since 1993. Additionally, TCJA did not change or reduce this 50% deduction for business meals.
We know that business meals are a 50% deduction and that entertainment is no longer a deduction. We also now know that the Code’s definition for entertainment includes food and beverages. Are food and beverages at an entertainment event with current or prospective clients still deductible? The IRS has now issued some guidance on that question in a notice released on October 3, 2018.
For a business meal to be deducted in an entertainment setting, it must meet the following requirements:
- The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- The food and beverages must be purchased separately from 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 a couple of examples:
Example 1: A business owner takes a prospective client to a professional baseball game and buys two (2) suite tickets that include food and beverages.
Result: The full amount paid is not deductible as a business expenses because no invoice, bill, or receipt was obtained that separated the cost of food and beverage from the cost of the overall ticket.
Example 2: A business owner takes a prospective client to a professional baseball game and buys two (2) suite tickets that include food and beverages. The business owner requests and obtains an itemized receipt showing the food and beverages expense was $200 and the game experience expense was $800.
Result: The food and beverage expense is entitled to a 50% deduction but the $800 games experience expense is a non-deductible entertainment expense.
This guidance provided by the IRS is helpful, and it is a good idea to always obtain itemized receipts, invoices, or bills for food and beverages in any entertainment setting. However, if you are unsure whether a food or beverage deduction is allowed, it is recommended that you consult with your tax professional.
Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to email@example.com.