After Tax Reform, Do Business Meals Remain Deductible? Because the passage of the Tax Cuts and Jobs Act (TCJA), taxpayers have been asking if business meals are still deductible business expenses. This question is the result of regulations specifically disallowing business deductions for activity that constitutes entertainment, amusement, or recreation – while continuing to permit a 50 percent deduction on business meals.
Which boosts the question: Is meals itself considered entertainment, and therefore disallowed under the new rules? This short article examines this is of entertainment for tax purposes and the impact of the new entertainment expense disallowance on the deductibility of business meals. Taxpayers used to have the ability to deduct 50 percent of the costs of meals and entertainment directly related to or associated with business.
In addition, there were several exceptions that allowed taxpayers a full or partial deduction for entertainment and foods expenditures. Sign up to our communications to get finance tips delivered straight to your inbox. The word “entertainment” means any activity which is normally thought to constitute entertainment, amusement, or recreation. The IRS uses an objective test to determine if a task is entertainment.
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Examples include entertaining at night clubs, sticktail lounges, theaters, country night clubs, golfing and athletic night clubs, sporting events, and on hunting, angling, vacation, and similar journeys. Also, entertainment range from expenses that fulfill the non-public, living, or family needs of a person. A “directly related” food and entertainment expense meant a task where the taxpayer had an expectation of a business benefit, included actual debate of business during the activity without significant distractions, and the principal purpose of the activity is business.
XYZ Corporation provides a hospitality room at a trade convention. Food and beverages are offered and XYZ’s products are on display. The hospitality room is a business setting for XYZ’s business for the purpose of displaying its products. The area and the meals and beverages meet up with the “directly related” test and are 50 percent deductible.
An “associated with” meal and entertainment expense designed that such expenditures were deductible if a considerable and bona fide business discussion took place immediately preceding or following a entertainment activity. Andrew of ABC Partnership takes a client to a theatrical performance. Two hours before the theatrical performance, Andrew requires the client to dinner to allow them to discuss a current project. The theatrical performance satisfies the “associated with” test because the entertainment activity implemented a bona fide business discussion, even if no business discussion occurred during the performance itself.