Eligibility for business expense deductions for business-related meals

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Earlier this month, the IRS gave guidance to businesses planning to deduct expenses for meals and entertainment which was at first thought to be eliminated by the Tax Cuts and Jobs Act.  Tax professionals may have originally understood this to mean the elimination of any business expense deductions that would be considered to be entertainment, amusement, or recreation related.  Tax professionals and business owners alike should know that this is not necessarily the case when it comes to deducting meals.

Before the new tax overhaul, businesses were able to deduct up 50% of entertainment expenses related to trade or business conduct that have occured before/after a legitimate business discussion or transaction. This has now changed, according to Section 274 of the new tax code.  The new code does not generally allow deductions for expenses related to entertainment, amusement, or recreation.  With that said however, the new act does not mention anything about deducting expenses in relation to business meals.

More specifically, the IRS has confirmed that taxpayers may in fact deduct 50% of expenses in relation to the cost of business meals under certain conditions.  Firstly, the taxpayer or an employee of the taxpayer’s business must be present at the meal. Furthermore, the food and/or beverages must not be considered to be a lavish or extravagant expense.  Meals that are deductible in this sense, can involve business contacts that are either current or potential customers, clients, or consultants.

Through written proposed regulations yet to be published, both the Treasury Department and the IRS plan to make clear what exactly constitutes a deductible meal expense as well as an entertainment expense. Until this happens, Mitch Elbarki of Sigma Tax Pro advises tax professionals “…to keep on the lookout for proposed regulations about business deductions to be posted by IRS…and in the meantime use the information currently issued by the IRS in Notice 2018-76, and advise clients accordingly.”