The Tax Cuts and Jobs Act of 2017 significantly changed the rules related to the deductibility of meal and entertainment expenses. Generally, business entertainment expenses (not including food and beverage expenses) are no longer deductible for amounts paid or incurred after December 31, 2017. Business meals continue to be deductible, but subject to limitations, and they must satisfy business connection and substantiation requirements.
New legislation adds an exception to the 50% limit for expenses for food or beverages provided by a restaurant paid or incurred in calendar years 2021 and 2022.
The use of the word “by” (rather than “in”) a restaurant makes it clear that the new rule isn’t limited to meals eaten on the restaurant’s premises. Takeout and delivery meals provided by a restaurant are also fully deductible.
It’s important to note that, other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for deducting business meals. All the other existing requirements continue to apply. Thus, to be deductible:
- The food and beverages can’t be lavish or extravagant under the circumstances.
- You or one of your employees must be present when the food or beverages are served.
- This is defined as a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business.
If food or beverages are provided at an entertainment activity, either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice, or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.
You will need to separate the various meals and entertainment expenses when preparing your tax return. Below are suggested accounts you may wish to set up:
- Entertainment mileage
- Meals (including travel meals)
- Meals – office celebrations
- Travel (airfare, lodging, mileage, etc)
- Nondeductible dues
- Professional dues and meetings
Entertainment includes activities that are generally considered to constitute entertainment, amusement, or recreation and are now nondeductible. Examples include entertaining at a country club or athletic events, at theaters, on yachts, or on hunting, fishing, vacation, and similar trips. These types of expenses should be classified as entertainment.
Business meals or meals with coworkers are 50% deductible if business is discussed during the meal and should be classified as meals. If no business is discussed, the meal is nondeductible and should be classifieds entertainment.
Meals while traveling for business are 50% deductible and should be classified as meals.
Office celebrations such as holiday parties, birthday and anniversary celebrations, picnics, etc. that occur occasionally are fully deductible and should be classified as meals – office celebrations.
De minimis beverages and snacks provided in the office to employees on a regular basis (including overtime meals and working lunches) are now only 50% deductible through the tax year 2025 and should be classified as meals. After 2025, these expenses will no longer be deductible.
Nondeductible dues include dues for membership in any club organized for business, pleasure, recreation or other social purposes and includes country clubs, athletic clubs, airline clubs, hotel clubs, clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. These types of expenses should be classified as nondeductible dues.
Professional dues and meetings including business leagues, chambers of commerce, professional organizations, and trade associations are deductible and should be classified as Professional dues and meetings.
Sponsoring various events such as charity dinners or golf tournaments will require separate classifications. The fair market value of the entertainment (golf portion for example) should be classified as entertainment, the FMV of the meal, if business is discussed, be classified as meals and the remainder should be classified as sponsorship.
There will be other situations that will require separating costs. For example, spending an evening with a client that includes dinner and a sporting event where substantial business is discussed would need to be separated into entertainment – mileage, meals, and entertainment.
To read more specific details, you can read the meals and entertainment section in IRS Publication 463 https://www.irs.gov/pub/irs-pdf/p463.pdf