Want to deduct a business meal? Get a separate receipt.
The repeal of the deduction for business entertainment expenses was a culture shift in the tax code that was not immediately apparent. After the passage of the law in December 2017, many taxpayers were shocked to find that traditional business practices, like golfing with clients and hosting business associates at sporting events, are no longer deductible. However, the deduction for business meals was preserved.
This disparity in treatment has caused confusion about the fate of business meals served during entertainment activities. Are they still deductible or not?
IRS Offers Clarifications
The IRS has released a Notice clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible meal expenses. The Notice gives taxpayers reliable guidance pending release of forthcoming regulations.
Under the Notice, taxpayers may deduct 50% of a business meal expense if they meet the following five conditions:
- The expense is an ordinary and necessary expense paid or incurred in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an 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
- 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 bills, invoices, or receipts.
The IRS warns that the entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages to hide the entertainment component.
IRS Gives Examples
The IRS offers the following examples to illustrate these rules.
Taxpayer Anne invites Brad, a business contact, to a baseball game. Anne purchases tickets for Anne and Brad to attend the game. While at the game, Anne buys hot dogs and drinks for Anne and Brad.
The baseball game is entertainment, so the cost of the game tickets is not deductible by Anne. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is deductible at 50%.
Taxpayer Charles invites Don, a business contact, to a basketball game. Charles purchases tickets for them both to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.
The basketball game is entertainment, so the cost of the game tickets is an entertainment expense and is not deductible by Charles. The cost of the food and beverages is not stated separately on the invoice. Charles may not deduct any of the expenses associated with the basketball game.
Assume the same facts as in Example 2 above, except the invoice for the basketball game tickets separately states the cost of the food and beverages.
The cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by Charles. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is deductible at 50%.
Taxpayers in Entertainment Business
Note that these rules apply to taxpayers who are not engaged in the entertainment business. Taxpayers whose business product is entertainment may still deduct their costs as business expenses and are not subject to the 50% limit for meals if meals are part of the business entertainment product. For example, the costs of putting on a concert by a music promoter are deductible business expenses.
The IRS Notice gives welcome guidance. The key to the deductibility of business meals will be how conscientious taxpayers are about obtaining separately itemized receipts.