Posted by Donna L. McClintock
Meals and Entertainment have a long history as targets for perceived abuse by businesses and taxpayers, which in turn brought scrutiny from the IRS. Deductions for Meals and Entertainment have been limited since the last major tax act in 1986. One major factor required to qualify as a deduction was if the expense be directly related to the business purpose, as well as be necessary and ordinary. The next limit to come was that the deduction was reduced to 50% and certain entertainment was disallowed. Now, for years beginning in 2018, no deduction is allowed for entertainment, even if it is was directly related to your business. No deduction for tickets to ball games, golf outings etc. Oh, my – what will happen to season ticket sales?
Besides eliminating the deduction for entertainment, if there is a meal incorporated in the price of the entertainment, no deduction is permitted for the meal (even at 50%).
Although it is still possible to receive a deduction of 100% for certain types of meals, some classes of meals deduction have been changed to a 50% deduction, while other classes of meals remain at 50%.
Examples of the type of meals remaining at the 50% deduction include business discussions with employees or peers at a luncheon/dinner meeting. Another example is having a business discussion with your client at lunch or dinner. A direct business discussion or purpose is required or the cost of the meal is disallowed as a deduction.
Board of Director meetings, department meeting, shareholder meetings, and meals while traveling on business are all examples of 50% deductible meals.
Here is one area that changed from 100% to 50%: Does your organization supply water, sodas, and snacks, etc. to your clients or employees? If so, the cost is now only 50% deductible whereas in the past it was 100%.
How about meals provided to the employees for working extra hours? Or a working lunch? These types of meals for the convenience of the employer are examples of the deduction changing from 100% to 50%. This includes meals at an employer-run cafeteria. After 12/31/2025 no deduction will be allowed.
Does your organization have a Holiday Party, Thank You Party, Team Building, or maybe a Summer Picnic? Good News! Businesses can still deduct 100% of the cost to these types of employee gatherings. The caveat to qualify is the gatherings are infrequent and open to all employees. Even team building events for certain departments or class of employees such as Happy Hours are included as 100% deductible, just so long as the event does not solely benefit the highly compensated employees.
Other expenses qualifying for a 100% deduction are: reimbursed cost included in an employee’s compensation or a subcontractor’s income; items made available to the general public (think giveaways) or sold to the general public (think restaurants).
With so many different deductible categories, adequate and proper documentation is important. One is still required to document the 4 W’s (remember those?). Who, What business was discussed, Where was the meeting, and When. In addition to the documentation of the expense, allocating, classifying and identifying the different types of deduction classes will help with the proper tax treatment at year end.