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Until the changes that took effect on January 1, 2018, taxpayers who met specific requirements could deduct 50% of the cost of meals provided to clients, customers, vendors or others for whom a business purpose for the expense could be established.  In general, for each meal, the taxpayer would have to document five (5) elements:

  • Date of the meal/entertainment
  • Amount of the meal
  • The location of the restaurant/eating establishment
  • The names of the individuals who were entertained
  • The purpose for the meal/entertainment

Typically, the receipt for the meal would have the information required for the first three items; on the reverse of the meal ticket or receipt, I recommend to clients that they write down the names of the individuals who were there, and a brief note as to the purpose for the meeting/meal.  Without all five elements provided, the cost of the meal would not be allowable as a deduction.

The deduction for entertainment expenses was always a favorite audit item by the IRS since most taxpayers (unless previously audited for the expense) fail to maintain the information/records to prove deductibility. 

So, to be deductible, your expenses for entertainment must be ordinary and necessary to entertain a customer or client and must meet the following:

  • Your expenses are of a type that qualifies as meals or entertainment
  • Your expenses bear the necessary relationship to your business activities
  • You keep adequate records and can substantiate the expenses.

The types of expenses that can qualify can include items other than just meals.  Expenses incurred to provide entertainment, amusement or recreation generally can be deductible under the proper conditions.  Some examples include entertaining guests at:

  • nightclubs
  • social, athletic and sporting clubs
  • theaters
  • sporting events
  • hunting, fishing, vacation and similar types of trips.
     

Entertainment expenses include the cost of meals you provide to customers or clients, whether the meal alone is the entertainment or it is a part of other entertainment.  For example, refreshments at a football game would be included.  A meal expense includes the cost of food, beverages, taxes and tips.

Tickets to entertainment events can be deductible.  However, the deduction is limited to the face value of the ticket (if you had to pay more than face value due to the popularity of the event).  There is an exception when the event benefits a charitable organization if the main purpose for the event is to provide the benefit.  In such a situation, the full cost is deductible, and the 50% limitation does not apply.  As an example, a store could provide bottled water to participants in a 10K race to raise funds for cancer research.  The full cost is deductible by the store since the primary purpose was to promote goodwill in the community.

To be deductible, the entertainment expense must meet two test:

  • directly related test
  • associated with test

Directly Related Test

In this scenario, the entertainment must take place in a clear business setting – like a restaurant.  If you cannot meet the clear business setting requirement, then all of the following conditions must be met:

  • You must have more than a vague expectation of deriving some income or other specific business benefit (other than a favorable attitude of the person entertained) from the meal or entertainment.
  • During the meal or entertainment, you actively engaged in business discussions
  • The main purpose of the combined business and entertainment is the active conduct of a business.

The following situations create a presumption that the directly related test has NOT been met.  The burden is on the taxpayer to prove otherwise:

  • There are substantial distractions (such as meetings or discussions occurring at night clubs, theaters, or sporting events)
  • The meetings or discussions take place a social gatherings such as cocktail parties
  • The group includes people other than business associates

Associated With Test

Meals and entertainment expenses may be deductible under this more lenient test so long as they meet two requirements:

  • The expenses are associated with the active conduct of your business.  In other words, there must be a clear business purpose such as getting new business or bolstering an existing business relationship.
  • The meal or entertainment occurs before or after a substantial and bona fide business discussion.

Timing is important!  Entertainment that occurs on the same day as the business discussion will meet the “directly precedes or follows” requirement.   If not on the same day, this presumption will not apply and the taxpayer will have to prove the connection.

Relevant facts considered in making a determination for deductibility would include the place, date and duration of the business discussion, whether you and your business associate are from out of town (and the dates of arrival and departure), and the reasons the entertainment didn’t take place on the same day as the business discussion.

In all circumstances, the expenses claimed must be reasonable in amount.  Any expense deemed extravagant or lavish would not be deductible.

NEW RULES STARTING JANUARY 1, 2018

Generally, under the new tax law, expenses for meals and entertainment are NOT DEDUCTIBLE.  There are certain exceptions that are covered below.

Meals – 0% deductible without further guidance from Congress or Treasury

  • Business meals with business associates, clients, customers, prospects or referral sources. NOTE – the IRS has been asked to review this aspect by the AICPA which takes the position that a very narrow exception is allowable (expenses for a business meal where the taxpayer is present and a business discussion takes place)

Meals and entertainment – 0% deductible   

  • All entertainment, including admission fees, tickets, food and beverage unless it meets one of the exceptions under the section titled, “Meals and entertainment – 100% deductible.”

Meals – 50% deductible

  • Employee travel meals: Meals incurred by an employee or self-employed individual while traveling away from home if their duties require them to be away from the general area of their tax home substantially longer than an ordinary day’s work, and they need to sleep or rest to meet the demands of their work while away from home while out of town;
  • Meals for employees, stockholder business meetings: meals directly related to business meetings of employees, stockholders, agents or directors;
  • Meals for meetings of business leagues: meals directly related and necessary for attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade that are exempt from taxation under section 501(a).

Meals for convenience of employer – 50% deductible

This is a separate account because these become 0% deductible in 2025 and this prevents having to change accounting and expense reporting systems in the future.

  • Meals served to employees who are required to staff their positions during breakfast, lunch, and/or dinner times; meals served to employees at in-office cafeterias;
  • Food and meal costs for employees who are required to live on premises for the convenience of the employer.

Meals and entertainment – 100% deductible

  • Expenses treated as compensation: meals, entertainment, amusement and recreational expenses treated as compensation and included as wages for income tax withholding purposes;
  • Reimbursed expenses: Expenses paid or incurred by the taxpayer, in connection with services performed for another person or business, under a reimbursement or other expense allowance arrangement with the person or business, if the taxpayer accounts to such person or business by providing a breakdown of the expenses;
  • Recreational, etc., expenses for employees: expenses for recreational, social, or similar activities (including facilities therefore) primarily for the benefit of employees (other than highly compensated employees);
  • Items available to public: expenses for goods, services, and facilities you or your business make available to the general public;
  • Entertainment sold to customers: expenses for entertainment goods, services and facilities sold to customers;
  • Expenses includible in income of persons who are not employees: expenses paid on behalf of nonemployees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award;
  • De minimis fringe benefit food and beverage: food and beverage, the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable. Potentially only 50% deductible; however, it appears not to be what Congress intended. Technical corrections may provide for 100% deductibility.