Many businesses have expenditures on meals and entertainment (M&E) as a part of normal business operations. Whether it is providing meals to employees, bringing staff and clients to sporting events or impressing prospects for new business, it is often part of the regular work week. Most business owners have the notion that for the most part, M&E is 50% deductible. This, however, is an oversimplification of the rules. In practice, M&E is either 100%, 50% or 0% deductible depending on the facts and circumstances.
TAX REFORM’s IMPACT
The 2017 Tax Cuts & Jobs Act has made important changes related to deducting M&E expenses. These changes are effective January 1, 2018. It is important for taxpayers to be aware and appropriately track meals and entertainment in accordance with the new rules to produce accurate tax deductions for 2018 and beyond.
We have provided the chart below as a quick reference to some of the changes (not all encompassing).
Generally, the new tax reform instills that no deduction is allowed for expenses relating to entertainment, amusement or recreation activities (including membership dues for such activities). The previous exception allowing “directly related to” or “associated with” exceptions has been removed with the Tax Reform.
Some examples of items subject to the 50% limit include:
– Meal expenses related to entertaining customers or prospects whether it be at your place of work, a restaurant or other locations
– Meal expenses related to attending a business convention, seminar, reception, luncheon
– Meal expenses relating to being away from home on business, whether alone or with others on business
– Meal expenses provided to employees for the convenience of the employer
QUALIFYING MEALS and RECORD KEEPING
When evaluating Meals expenses for deduction, the first step is to ensure the following criteria are met:
· ORDINARY AND NECESSARY – The meals must be “ordinary and necessary”
– Ordinary means common and accepted in a field of business
– Necessary means helpful and appropriate to your business
· Directly-Related Requirement – The following must be shown:
1. The main purpose of the entertainment was the conduct of
2. You engaged in business during the entertainment period.
3. You expected to get income or some other business benefit.
· “Associated-With”” Requirement – The following must be shown:
1. The expense is associated with the active conduct of a trade or business. So, the expense must have a clear business purpose, such as, getting a new business or encouraging the continuation of an existing business relationship.
2. You discuss a substantial amount of business before, during, or after the meal or entertainment.
1. The amount of expense;
2. The time and place of the meal or event;
3. The business purpose of the expenditure; and
4. The business relationships of those in attendance.
From a tax audit perspective, lack of substantiation for your meals and entertainment is often an easy adjustment for the IRS agent.
The deductions for M&E under IRC Section 274 have been made even more complex by Tax Reform. If you have any questions related to the deductibility of meals or entertainment expenses for your business please contact us so that we can evaluate your specific facts and circumstances.
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Disclaimer: Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Newburg & Company, LLP would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.