Meal and Entertainment Deduction
The Tax Cuts and Jobs Act (TCJA) eliminated the deduction for expenses related to activities generally considered entertainment, amusement or recreation incurred after December 31, 2017. Business expenses related to food and beverages may still be deducted if certain requirements are met. Final IRS regulations on what is considered entertainment and the exceptions to the disallowance of deductions for entertainment expenses were adopted on September 30, 2020. The regulations can be summarized as follows:
- No deduction is allowed for an expense for an activity that is of a type generally considered to be entertainment, or with respect to a facility used in connection with an entertainment activity. An objective test is used to determine whether an activity constitutes entertainment.
- Dues or fees paid to any social, athletic, or sporting club or organization are treated as items with respect to entertainment facilities and are not deductible. In addition, no deduction is allowed for amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose.
- Entertainment means any activity which is generally considered to constitute entertainment, amusement, or recreation, such as entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, hunting, fishing, vacation and similar trips. These activities are treated as entertainment regardless of whether the expense for the activity is related to or associated with the active conduct of the taxpayer’s trade or business.
- Entertainment may include an activity which satisfies the personal, living, or family needs of any individual, such as providing a hotel suite or an automobile to a business customer or the customer’s family. However, it does not include activities which satisfy the personal, living, or family needs of an individual if they clearly do not constitute entertainment, for example, expenses for lodging, meals and transportation incurred while traveling for business.
- Entertainment does not include expenses for food or beverages unless the food or beverages are provided at or during an entertainment activity. However, food or beverages provided at or during an entertainment activity, are not considered entertainment if the food or beverages are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts which reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items. If the food or beverages are not purchased separately from the entertainment, or the cost of the food or beverages is not stated separately from the cost of the entertainment, no allocation between entertainment and food or beverage expenses may be made and the entire amount is a nondeductible entertainment expenditure.
- Entertainment expense does not include expenses for recreational, social, or similar activities primarily for the benefit of employees, other than employees who are highly compensated employees. Hence, if an employer rents a banquet hall for the purpose of a holiday party to which all employees are invited and provides food and beverage at the event, the cost of the rental of the banquet hall and the food and beverage cost will be fully deductible.
- No deduction is allowed for food or beverages expenses unless: (a) The expense is not lavish or extravagant under the circumstances;(b) The taxpayer, or an employee of the taxpayer, is present at the furnishing of such food or beverages; and (c) The food or beverages are provided to the taxpayer or a business associate. The deduction for food and beverage expenses which satisfy these requirements is limited to 50% of the expense amount.
- The deduction for food and beverages provided to employees is limited to 50%. Thus, if an employer stocks an employee break room with beverages and snacks, the deduction for the cost of these items is limited to 50%. However, if 50% or more of the food and beverage items are consumed or reasonably expected to be consumed by customers or other members of the public, then the entire cost is deductible even if the items are also available to, and consumed by, employees. If at least 50% of the food and beverages are not consumed by members of the public, then the only part of the cost of the food and beverages that are fully deductible is that attributable to the food and beverages cost consumed by the general public.
The above discussion is limited to the general rules of the law and regulations relating to the deduction of meal and entertainment expenses. As with all laws and regulations, there are exceptions to the general rules which may apply in some situations, but which are beyond the scope of this newsletter. For additional information please feel free to reach out to me or refer to this link: https://www.irs.gov/pub/irs-drop/td-9925.pdf