Meals Deduction – On or Off the Table for 2018?

Since the Tax Cuts and Jobs Act (TCJA) was passed, we’ve been waiting on further guidance from the IRS regarding key changes to tax code for 2018. One of those areas being the Meals and Entertainment deductions under Sec. 274.

It was clear from the get go that the Entertainment deduction for businesses was off the table and expenses related to entertainment, amusement, and recreation would no longer be deductible. However, we were all left wondering – would the Business Meals deduction remain on the table?

The long-awaited guidance from the IRS is out and taxpayers can rely on guidance in Notice 2018-76 until the IRS issues proposed regulations to deduct 50% of the amount of the expense.

Here is what you need to know about the specific rules around the new Meals deduction:

» 274(k) states that (1) meals cannot be lavish or extravagant under the circumstances and (2) the taxpayer (or an employee of the taxpayer) must be present when the food or beverages are furnished.

» 274(n)(1) states that the expense cannot exceed 50% of the amount of the expense that otherwise would be allowable.

» The meal expense would still need to be paid or incurred while carrying on a trade or business.

» The food and beverages are provided to current or potential business customer, client, consultant, or similar business contact; and

» If provided during or at an entertainment activity, they are purchased separately from the entertainment.

In the past, an employer was able to deduct 100% of meals provided to employees for the convenience of the employer, in addition to meals with clients, customers, or other business contacts. Meals brought to the office during meetings, meals during busy seasons, office coffee, donuts, and snacks have historically been 100% deductible deductions. This deduction has now been limited to 50% and is set to be nondeductible after 2025. The only area that is currently is still 100% deductible is office holiday parties.

With the Meals deduction remaining on the table and the entertainment being taken off as a deduction, you’ll want to be sure to set up separate accounts in your accounting software for these two expenses. In the past you may have simply had one account called Meals and Entertainment, with which your tax preparer disallowed 50% of the expense as a taxable deduction. Going forward, your Meals account will be treated that way, but your Entertainment account will be 100% disallowed.

And as with any expense, it’s important to keep all the proper documentation. In addition to the receipt, proper documentation for meals includes keeping a record of who was there and business purpose of the meal.