You may have heard that in the Tax Cuts and Jobs Act (TCJA), passed in December of 2017, there was a prohibition put in place against entertainment expenses. Historically, there was a deduction allowed of up to 50% of those entertainment expenses that were otherwise an ordinary and necessary business expense. However the TCJA removed the ability to deduct entertainment expenses for business.
Entertainment expenses classically, for example, would be taking some clients, vendors, contacts or business associates to a sporting event. In the past this might have been an entertainment type expense that could have been deducted if the criteria were met. Now it is no longer deductible.
The question that many of us were considering immediately after the law change, was “At what point would a meal expense be considered an entertainment expense? And is it possible that under this new law that we might lose deductibility of some business meals because they might be considered more entertainment-related than just a classic kind of business meal?”
We received some taxpayer friendly guidance from the IRS in regards to this in September 2018. In my own business, and in with my clients, it is far more common to have a business meal, than let’s say, going to an entertainment venue. This guidance makes it fairly clear that the deductions, which you normally might have taken in the past, for business meals, will still still be deductible, subject to the 50% limitation. Meals are not going to be automatically considered entertainment, and that’s good news!
The IRS guidance goes even further, stating that even if you’re having a business meal at an entertainment venue, it could still be considered deductible up to 50%, as long as the food is invoiced separately from the entertainment expenses. Of course it would need to be clear what amount you’re paying for a meal versus the amount you’re paying for entertainment, in order to meet the criteria.
The specific example that they use is a sporting event. If you get tickets to a sporting event, those tickets would no longer be deductible, even if there was a business purpose behind it. However if you then bought hot dogs and a soda at that sporting event and you had a separate receipt for said hot dogs and soda, it would be deductible, if it was considered to be an ordinary and necessary business expense as part of working with a business contact, etc. They compare that to this scenario: “What if I rent out a suite at a sporting event, and food is provided but not separately invoiced?” In this case you can’t separate the cost of the food from the cost of the suite, therefore, the food would not be deductible.
I see this as good news because the IRS is making it clear that this the prohibition against deducting entertainment costs doesn’t automatically disallow business meals.