The original regulations regarding the Meals and Entertainment deductions were part of the 2018 Tax Cuts and Jobs Act (TCJA). Companies and self-employed individuals have been subject to these rules since then; however, there was ambiguity regarding the rules over the past few years. Fortunately, the IRS recently published the final regulations regarding the changes to the Meals and Entertainment deductions under the TCJA.
If you recall, prior to the TCJA, both meals and entertainment expenses were at least 50% deductible with a few other expenses being fully deductible. Under the TCJA regulations, there were some categories of the meals that were still eligible for 50% deduction just as under the old law. Meals with clients, meals during business travel, and meals at seminars and conference all continue to be 50% deductible. However, there were significant changes to some categories of meals and entertainment expenses:
1) Entertainment expenses, such as sporting events and club memberships that were 50% deductible under the old law are not deductible under the TCJA. Note that meals purchased separately at these events for the client while discussing business would still be eligible for a 50% deduction.
2) Meals, water, coffee, snacks, etc. at the office for benefit of employees are now eligible for only a 50% deduction. Under the prior law, these expenses were eligible for the full deduction.
What Actions Should I Take?
We suggest that your accounting records segregate entertainment, meals, and office snacks in separate accounts to identify the proper deductibility of these expenses. Please note that picnics and holiday parties held primarily for the benefit of your employees will continue to be fully deductible. We suggest that this amount be recorded in a separate account from the entertainment, meals, and office snacks accounts.
Click here to view a chart with common meals and entertainment categories, and the deductibility of each category for tax purposes. Note that effective for tax years 2021 and 2022, the recently-passed COVIDTRA allows for a 100% tax deduction for expenses for food or beverages provided by a restaurant.
What hasn’t changed? Meals with clients and others for business purposes still require substantiation (the amount, time and place, business purpose, and business relationship).
Cray Kaiser is here to help if you have further questions about the meals and entertainment deductions. Please contact us today at 630-953-4900.
Please note that this blog is based on laws effective in January 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.