IRS brings clarity to tax treatment of business meals

October 4, 2018|Brian Strnad

The Tax Cuts and Jobs Act brought changes to how business meals and entertainment expenses were deducted, and some changes proved to be a source of confusion for many taxpayers and tax professionals alike. With recently announced interim guidance from the IRS, some of the uncertainty surrounding business meal expenses may be cleared up.

On October 3, 2018, the IRS issued long-awaited guidance regarding business meal deductions. The passage of the Tax Cuts and Jobs Act of 2017 placed stricter limits on entertainment expense deductions, but created widespread confusion surrounding the tax treatment of business meals starting January 1, 2018.

What caused the confusion?

Tax reform essentially eliminated the 50% deduction for any expenses related to entertainment, amusement or recreation activities. In addition, the wording of the tax reform law as it related to meals was not clear. At the crux of the confusion was determining whether business meals with business associates, clients, customers, prospects or referral sources would be 50% or 0% deductible.

How should business meals be handled?

The IRS clarified changes to the entertainment deduction and specifically provided interim guidance related to the deduction of business meals—news welcomed by many businesses that thought the deduction had been wiped out.

In particular, the IRS guidance reads as follows:

  • Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverage expenses are ordinary and necessary in carrying on the trade or business and are not considered lavish or extravagant under the circumstances.
  • The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
  • Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event or if the cost of the food and beverages are stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

Next steps

We’ve updated our earlier article, “Tax reform: Meals and entertainment changes for businesses in 2018,” which provides details for how various situations should be treated.

The IRS is expected to release proposed formal regulations, and we’ll continue to monitor and share information as needed. Until then, refer to Notice 2018-76 for specific guidance.

For more information about meals and entertainment deductions as they relate to your specific situation, please contact us or call 800-236-2246.

Brian Strnad, CPA, is a shareholder at Schenck. He has extensive experience in tax planning for closely held businesses and individuals. Brian also provides tax research and tax planning for businesses in the manufacturing, construction, real estate and service industries.

Tags: Tax