Q: In your Feb. 12 Legal Briefs column, "New tax law will hurt the meetings and incentive business," you wrote about the deductibility of business meals and entertainment under the new tax law going into effect this year. You stated, "Starting with the Carter administration, only 50% of business meals and entertainment have been deductible to the corporation, unless it is 'lavish or extravagant.' Now, the other 50% has become nondeductible." I understand that the IRS may have decided to interpret the law to allow such deductibility for meals, notwithstanding the language of the tax law. Is that correct?
A: Yes. Notwithstanding the literal language of the new tax law, the IRS will continue to allow the 50% meal deduction when business people take clients or prospects out to a nice lunch or dinner. However, the IRS did impose some new conditions on deductibility.
Background: Under the new tax law that took effect in January, the section of the IRS Code dealing with business deductions was amended to prohibit any deductions for business entertainment expenses. Many experts assumed that this prohibition covered business meals for clients, since such meals are a form of entertainment.
Now, under "transitional guidance" issued on Oct. 3, the IRS bowed to pressure from business and accounting groups that have been in an uproar about a literal interpretation of the tax law. The IRS guidance is novel and somewhat creative because it distinguishes between meals and entertainment, even though the new tax law did not make that distinction.
According to the IRS, taxpayers may deduct 50% of a business meal if five criteria are met:
- The expense is an ordinary and necessary expense paid or incurred during the tax year 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 customer, client, consultant or similar business contact.
- 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 one or more bills, invoices or receipts.
The IRS states that its transitional guidance will be superseded by proposed regulations, which eventually will be adopted as final rules. In the meantime, you may rely on the guidance, according to the IRS.
For client entertainment, such as game tickets or golf outings, the total prohibition on deductions has been retained. So, if you bring your clients to a baseball game, the cost of the tickets is not deductible, but the cost of the hot dogs and beer is 50% deductible if separately recorded.
There is an interesting exception allowing 100% of the cost of food if the food is available to the general public as a form of advertising or promoting goodwill. So, if everyone who shows up at cruise night in a local hotel gets free food, you can deduct the entire food expense, even though you are entertaining prospective clients.
If you bring in pizza for your employees or provide other meals, the expenses used to be 100% deductible. Under the new law, they are just 50% deductible until 2025, when the expense will be nondeductible.
As with all tax laws, there are exceptions and difficult cases that require the advice of a tax attorney or CPA.