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TAX ALERT: Businesses can Continue to Deduct 50% of Client Meals

TAX ALERT: Businesses can Continue to Deduct 50% of Client Meals

Last year’s tax overhaul via the Tax Cuts and Jobs Act, H.R. 1 (“the Act”) made cuts to write-offs and benefits for businesses. A significant change was made in terms of what could or could not be considered as entertainment expenses. However, earlier this week, the Internal Revenue Service (IRS) returned a tax break through clarifying guidance. Businesses can continue to deduct up to 50% of meals while they are entertaining clients and customers. This was a clarification on changes that were built into the Act, and were thought lost when lumped in with “entertainment expenses.”

President Trump’s tax reform bill eliminated deductions for any expenses considered “entertainment.” These range from sporting events participation (i.e. golf outings), trips, cruises, and tickets for shows or concerts. It had been previously assumed that deductions for meals used to entertain clients had also been taken away in that same sweep as the other “entertainment” related expenses targeted in Section 274.

According to the IRS guidance, meals with clients are considered deductible as long as a separate receipt is provided with the applicable charges. IRS instructions are as follows:

“Under this notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary expense under Sec. 162(a) paid or incurred during the taxable year in carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the 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.

The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.”

The IRS guidance also lays out a few scenarios to clarify which expenses are deductible, and which are not.

Scenario 1: You invite a business contact to a baseball game and purchase the tickets. While at the game, you purchase food and beverage for you and the contact.

Result: The tickets for the game is “entertainment,” and the cost cannot be deducted. The food and drinks were purchased separately from the tickets and are therefore not subject to the disallowance. Therefore, you may deduct 50 percent of the cost of food and drink if you submit the receipt.

Scenario 2: You invite a business contact to a basketball game and purchase tickets for a suite. Food and drinks are provided in the suite and are included in the cost of the tickets.

Result: Tickets to the suite are considered “entertainment” and are not deductible. The food and drinks are also not deductible because they are included in the cost of the tickets and are not stated on a separate invoice/receipt.

The IRS and the Treasury Department will be issuing clarified guidelines as to what will be defined as “entertainment” and when business meals will be available for deduction, but until that new information is announced; taxpayers can refer to Notice 2018-76, which was released with the announcement on Wednesday.

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