Since the Tax Cuts & Jobs Act was passed in late 2017, there has been much discussion about the deductibility of business entertainment expenses. While the TCJA eliminated deductions for business expenses related to entertainment, amusement and recreation activities, one key provision was left in place: businesses are still allowed to deduct 50% of the cost of food and beverages provided during or at entertainment events, if purchased separately from the entertainment or if the cost is stated separately from the cost of the entertainment. In addition, the Act did not eliminate the general 50% deductibility of food and beverage expenses associated with operating a trade or business. Specific tests must be met to maintain deductibility. Those tests include:
- The expense is ordinary and necessary and paid in carrying on a trade or business;
- The expense is not lavish or extravagant;
- The taxpayer or an employee is present when the food or beverages are furnished; and
- Food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact.
- If the food is provided during or at an entertainment activity the separate invoice requirement applies.
For example, a taxpayer purchases a block of tickets for business contacts to attend a sporting event. Deductibility scenarios are:
- Cost of tickets: not deductible
- Cost of tickets that includes food and beverages and tickets do not separately state value of food & beverages: entire cost not deductible
- Cost of tickets that includes food and beverages and tickets separately state value of food & beverages: 50% of the stated cost of food & beverages is deductible
- Cost of meals, if purchased separately: 50% meal deductibility
Clarification is on the Horizon
The IRS has stated that it will published proposed regulations to clarify deductibility of business meal expenses. Until that time, these general guidelines should be followed. If you have any questions, please contact Mark Abrams, Tax Partner with Smith & Howard at 404-874-6244 or fill out the contact form below.