With a nod to the Tax Cuts and Jobs Act (TCJA), the IRS issued final regulations in October that codify the rules around tax deductions for business entertainment and meals.
The short version is that entertainment and amusement are out (as we suspected they would be) and food and meals are still in—with strings attached (also predicted).
In February of this year, the IRS released proposed regulations on meal and entertainment expense deductions. By and large those proposed rules stuck, with a few clarifications. Here are a few points:
- Entertainment and amusement expenses are no longer even partially deductible. This would be the tickets to the game, the movie premiere, or the Big Event. Still deductible are some exceptions for activities provided for employees, and prizes or awards of achievement that act as incentives for employees. Of course, employees must still report such largesse on their own tax returns.
- With a 50 percent deductible limit, the cost of beverages and foods that are purchased as a necessary and ordinary business expense are still allowed. The taxpayer—or the employee of the taxpayer—must be present at such occasions and the food served may not be extraordinarily lavish.
- An important tip when entertaining clients is to be sure your receipts are separated. In other words, do not pay for meals and beverages on the same receipt for which payment is made for day spent on the luxe fishing yacht.
- These deduction opportunities abide for individuals who can realistically be considered a client or potential client. This could be a “supplier, agent, advisor, customer, or employee,” but it is not your spouse, family, or cohort of cronies looking for a break on the dinner tab. Bottom line, be careful what you claim, you may have to explain it.
Taking a close look at how business and industry can use a tax deduction on food is great, but reality bites. With COVID-19, many marketing and sales managers have been furloughed or seen their territory shrink to the size of a Zoom computer screen. While meals may be offered, the good times do not exactly roll when the occasion is marked by fear of contagion. A tax deduction for meals is great, but business-as-usual would be a lot better.
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