The Tax Cuts and Jobs Act of 2017 (TCJA) slashed many common deductions for business meals and entertainment. Yet a great deal of confusion remains about what is, and is not, deductible. Although most entertainment expenses no longer qualify (with some exceptions), many expenses for business meals continue to be deductible, at least in part. Here’s a quick review.
Entertainment
The TCJA generally ended the practice of deducting expenses for activities deemed “entertainment, amusement, or recreation.” Also eliminated are club memberships, regardless of how much business may be deducted there. And businesses can no longer deduct the cost of facilities related to entertainment, amusement, or recreation.
Meals
Businesses can still deduct 50 percent of the cost of business meals, so long as business is conducted during these meals, they’re not lavish or extravagant, and certain other requirements are met. (Note: under legislation passed in late 2020, otherwise eligible food and beverages are100% deductible in 2021 and 2022 if purchased from a restaurant.)
With the elimination of most entertainment deductions, many businesses were uncertain about the tax treatment of meals provided during an entertainment activity. Fortunately, the IRS provided some guidance: You can deduct 50 percent of food and beverage expenses (100% if purchased from a restaurant) provided during an entertainment activity as long as they are purchased separately or itemized on an invoice or receipt. So, for example, if you take customers to a baseball game and buy them hot dogs and beer — and the other requirements for deducting business meals are satisfied — then you can deduct the cost if it’s separately stated on an invoice or receipt. On the other hand, you can’t deduct the cost of a corporate suite or box that includes food and drinks, unless the meal costs are separately stated on the invoice.
What about meals provided at or near the workplace? Previously, businesses could deduct 100 percent of meal costs — such as those provided for the employer’s convenience or to facilitate overtime work — that were excluded from employees’ income as “de minimis” fringe benefits. The TCJA reduced the deduction for such costs to 50 percent and eliminated most of these deductions beginning in 2026 (although the benefits will still be excludable from employees’ income).
Exceptions
There are a few exceptions to the rules outlined above. For example, businesses can still deduct 100 percent of meal and entertainment costs that are treated as employee compensation. And there’s a 100-percent deduction for recreational or social activities — such as holiday parties, picnics, or outings — that are primarily for the benefit of rank-and-file employees rather than owners or management. Businesses can also deduct meal and entertainment expenses for certain employee or stockholder meetings or conferences: Meal expenses are 50-percent deductible, but there’s some uncertainty over whether entertainment expenses are 50-percent or fully deductible.
If you have questions about the deductibility of your meal and entertainment expenses, please contact us. Note that the TCJA did not change the rules regarding deduction of business travel expenses.
