​Are There Meals and Entertainment Expenses Your Business Can Still Deduct?

The IRS recently released final rules about what expenses businesses can and can’t deduct when it comes to meals and entertainment.

In 2017, the Tax Cuts and Jobs Act eliminated most deductions related to “activities generally considered entertainment, amusement or recreation.” But according to the IRS’s most recent release, “taxpayers may still deduct business expenses related to food and beverages if certain requirements are met.”

The new guidance tries to help businesses determine if an activity is considered entertainment and how to distinguish food and beverage expenses from those that the IRS considers entertainment. It also addresses restrictions on food and beverage expenses, generally limited to 50% of qualifying expenditures.

According to the new regs, “entertainment” does not include food or beverages unless they are provided at or during an entertainment activity and their costs aren’t separate from entertainment costs.

Food or beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

Under this definition, employees are a type of business associate, so employer-provided food or drinks would qualify as a business expense. This would also hold true for meals a taxpayer provides employees and business associates at the same event.

Businesses will need to separate deductible meal expenses from nondeductible entertainment expenses. The final regs address how this would play out in certain circumstances, and the IRS provided several new examples too.

If you have questions about how these new regulations could affect your business, please reach out to us.