For decades, taxpayers who are in business have been allowed to partly deduct the cost of meals with clients, customers, employees and others. However, many feared that this beloved deduction was lost as a result of the Tax Cuts and Jobs Act ("TCJA") that went into effect on January 1, 2018.
The TCJA eliminated all 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. Many tax experts feared that, for these purposes, “entertainment” also included paying for meals or beverages at restaurants or other places. If so, business-related meals would no longer be tax deductible—a huge change that would adversely affect restaurants and other businesses.
Fortunately for restaurants and business owners who like to eat in them, the IRS has advised that the tax deduction for business-related meals has not been eliminated by the TCJA. Fifty percent of meal and beverage costs are deductible as a business expense if they are:
You or an employee needs to be present at the meal to take this deduction. Moreover, the meal must be furnished to current or potential customers, consultants, clients or similar business contacts. The IRS does not require that you actually close a deal or get some other specific business benefit to take this deduction.
The meal need not be indispensable to be “ordinary and necessary;” it just needs to be helpful to your business.
Although the meal may not be “lavish or extravagant,” there is no dollar limit on how much you can spend, nor are you barred from eating at deluxe restaurants. You must use your common sense to determine if a meal is too lavish under the circumstances. In practice, the IRS will rarely second guess you on this, especially if you have good documentation for the expense.
Example: Ivan, a sole proprietor consultant, has a lunch meeting with a prospective client. He chooses a lunch meeting at a nice restaurant because it’s more informal and the prospective client will like getting a free lunch. He pays $150 for the lunch. Ivan can deduct 50% of the cost of the lunch--$75--as a business expense.
What about meals you pay for during an entertainment activity, like a sporting event? These are deductible if they are purchased separately from the entertainment or listed separately on the receipt.
Example: You treat a client to a baseball game (which you also attend) and pay for beers and food while at the game. Since you paid for the beer and food separately, you can deduct 50% of the cost. You can’t deduct the cost of the tickets.
What if the cost of tickets for an entertainment event like a ball game include the cost of food and beverages? The food and beverages are not deductible unless separately listed on the bill or invoice. Entertainment facilities offering package deals including food and beverages will doubtless be happy to separately list their cost so you can get a tax deduction.
Historically, food and beverage expenses have been closely scrutinized by the IRS because of past abuses by taxpayers. For this reason, it is wise to keep good records of such expenses. Whenever you incur an expense for business-related meals, you must document the following facts:
The IRS does not require that you keep receipts, canceled checks, credit card slips, or any other supporting documents for meal expenses that cost less than $75. However, you must still document the facts listed above.