By Jason Watson (Google+)
Posted November 23, 2018
We chatted about business meals earlier in the chapter. The Tax Cuts and Jobs Act of 2017 (TCJA) redefined meals and entertainment. In a nutshell, entertainment was removed as a deduction and meals were left in limbo (bad law writing). As such, the IRS released Notice 2018-76 which essentially restores meals, but not entertainment, back to old law.
IRS Notice 2018-76
Now with the clarification offered by IRS Notice 2018-76, 50% of business meals may still be deducted if you follow these guidelines as outlined in the notice-
- The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable 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 business customer, client, consultant, or similar business contact; and
- 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 entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Here is an example of a business meals tax deduction that is allowed (straight from the wizards at the IRS who label everyone as A and B)-
Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.
The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
There are more examples in the IRS notice, but you get the idea. Old school is now the same school, just make sure you disconnect the meal from the entertainment. And no boosting the meal bill to reduce the entertainment bill just to be able to deduct it- “this hot dog cost $100, but it came with a free baseball ticket.” Ummm… Nope! See #5 above.
Other considerations that are commonly forgotten-
- You can deduct 50% for meals with employees when business is discussed. Common deduction when you add your spouse on payroll (and he or she actually does work).
- You can deduct 50% of the cost of transportation to and from the venue where the meal is consumed. Denver to Aspen on United to eat at Jimmy’s. Seems reasonable, and the meatloaf is unbelievable (who uses Kobe beef for meatloaf?)!
- You can deduct 50% of the costs associated with the meal such as taxes and tips, keeping in check with lavish or extravagant. Tipping $500 at McDonald’s for the extra cheese on your whopper, and then asking for a kickback out back behind the dumpster is probably not good. If you do, get a receipt… we’re sure you paid a commission on the kickback (kidding!).
This is a trick. McDonald’s sells big macs not whoppers.
For business discussions during a meal, you must have a clear business goal in mind, the discussion must be substantive beyond casual conversation, and you must have an expectation of income or benefit to your business from the meeting. The meeting’s main purpose should be business related with the eating of food being incidental or secondary.
Entertainment has been removed from Section 274 thanks to the Tax Cuts and Jobs Act. Here is a short list of the entertainment activities where the IRS would historically deny a business conversation effectively took place- nightclubs, theaters, sporting events, large social gatherings, hunting or fishing trips, pleasure boating, and Yes, golf outings. The theory is simple- you must be discussing business matters, and in the eyes of the IRS these activities don’t allow for that. Not our argument, so don’t blame us.
You may also deduct as a business tax deduction the cost of meals for business discussions that occurred before or after the meal. For example, after a lengthy day of negotiating a business transaction you take the associate out for a nice dinner to relax. While eating your dinner nothing is discussed about business. Since these two events are so closely related, the cost of the dinner is deducted as a meals expense. The business discussions before or after the meal must be substantial and closely connected (nexus).
Everyday Business Meals
Business owners try to deduct meals they eat while traveling throughout the day. This is not a tax deduction. The theory on this is straightforward- you have to eat regardless of owning a business or not. In other words, your meal is not contributing directly to the operations or success of your business. The IRS is clever- they don’t mind giving you a tax deduction today on something that eventually will result in taxable business income through growth and profits in the future.
Spouse Business Meals
What happens if your spouse tags along to a business meeting over dinner? Or if the client or business associate brings his or her spouse? Do you have to split the bill up between business and non-business participants? No. The IRS considers the spousal attendance to the meeting to be incidental.
Can your spouse be considered a business associate as an employee? Of course. Before you get all excited about trips to Gallagher’s in Time Square with your spouse to discuss business, we encourage restraint and reasonableness. If the occasional business discussion occurs during a meal, and the meeting’s original intent was business, then this becomes a small business tax deduction at 50%. Position yourself carefully, and Yes, your spouse needs to be an employee.
Now we have three rules.
- You can deduct 100% of the meals you provide your employees if the meal is for the convenience of the employer, such as working lunches, and provided on the business premise.
- You can deduct 100% of the meals you provide related to employee recreation such as holiday parties and picnics (assumed to be off the business premise).
- You can deduct 50% of the meals provided on the business premise where the meals “promote goodwill, boost morale or attract prospective employees” according to IRS Publication 15-B. In addition the employees cannot include officers, shareholders and anyone who owns 10% of greater interest in the business. So, a one-person S Corp shareholder cannot deduct 50% of his or her meals under this rule.
De Minimis Meals
The IRS is generous. They also say that meals, such as coffee and donuts, provided under de minimis rules are not considered imputed income to the employees. How nice?! Here is the blurb form the IRS-
In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded under Internal Revenue Code section 132(a)(4) and include items which are not specifically excluded under other sections of the Code. These include such items as:
- Controlled, occasional employee use of photocopier. “Bob, making copies.”
- Occasional snacks, coffee, doughnuts, etc. Glazed only.
- Occasional tickets for entertainment events (we’ll see if this gets removed after TCJA).
- Occasional meal money or transportation expense for working overtime
- Group-term life insurance for employee spouse or dependent with face value not more than $2,000
- Flowers, fruit, books, etc., provided under special circumstances such as your 103 year old grandmother died.
- Personal use of a cell phone provided by an employer primarily for business purposes. Don’t even go there on this one!
In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation. Therefore, routine dinners with your business partner are not de minimis. It might not qualify for the 50% either unless a business purpose is germane to the meal.
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