The Tax Deductible Business Meal Under the Tax Cuts and Jobs Acts

Business-related meals and entertainment costs are no longer deductible under the new tax law.

For decades, taxpayers have been allowed to partly deduct the cost of meals that were business-related. All that was required was that the meal be either "directly related to" or "associated with" the active conduct of the taxpayer’s trade or business. These tests could be satisfied if you had a bona fide business discussion, negotiation, meeting, or other business transaction before, during, or after the meal. If the discussion occurred during the meal, however, you had to have a reasonable expectation that you would get some specific business benefit—for example, obtaining a new client. If either test was met and you properly documented the cost and purpose of the meal, you could deduct 50% of the cost.

Example: In 2017, Ivan, a sole proprietor consultant, has had ongoing email discussions with a prospective client who is interested in hiring him. Ivan thinks he’ll be able to close the deal and get a contract signed in a face-to-face meeting. He chooses a lunch meeting because it’s more informal and the prospective client will like getting a free lunch. He treats the client to a $100 lunch at a nice restaurant. During the lunch, they finalize the terms of a contract for Ivan’s consulting services and come to a handshake agreement. This meal clearly led to a specific business benefit for Ivan, so he can deduct half of the cost of both his and his client’s lunch as a business entertainment expense.

Well, those days are done. One of the less remarked upon provisions of the Tax Cuts and Jobs Act ("TCJA") eliminated business deductions for "entertainment, amusement, or recreation." (IRC Sec. 274(a).) This includes most things you’d think of as entertainment, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing or vacation trips. However, for these purposes, “entertainment” also includes providing meals or beverages at restaurants or other places. (IRS Reg.1.274-2(b).) As a result, starting in 2018, you cannot deduct the cost of meals as business-related entertainment, even if they help you generate new business or result in other specific business benefits. Thus, if Ivan from the above example has a $100 lunch with a prospective client during 2018 or later, he may not deduct 50% of the cost, even if the lunch helps him land new business.

It's not entirely clear that Congress realized it was eliminating many business meal deductions when it changed the tax code in this way. But this is the way the law reads now. Unless the IRS takes some extraordinary action to save this deduction through new regulations (which is unlikely) the business meal deduction is gone.

Not all meal deductions have been lost, however. You may still deduct 50% of the cost of meals you consume while you travel for business. This is a business travel expense deduction, not an entertainment deduction. You may also deduct the cost of food you provide for employee parties or other social events. Also deductible is 50% of the cost of food provided for business meetings of employees, stockholders, agents, or directors. But the days when you could deduct 50% of the cost of a meal at a fancy restaurant appear to be over.

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