Business Meals Tax Deduction Updated

Now with the clarification offered by IRS Notice 2018-76, 50% of business meals may still be deducted if you follow these guidelines as outlined in the notice-

1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
2. The expense is not lavish or extravagant under the circumstances;
3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

Here is an example of a business meals tax deduction that is allowed (straight from the wizards at the IRS who label everyone as A and B)-

Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

There are more examples in the IRS notice, but you get the idea. Old school is now the same school, just make sure you disconnect the meal from the entertainment. And no boosting the meal bill to reduce the entertainment bill just to be able to deduct it- “this hot dog cost $100, but it came with a free baseball ticket.” Ummm… Nope! See #5 above.

Other considerations that are commonly forgotten-

• You can deduct 50% for meals with employees when business is discussed. Common deduction when you add your spouse on payroll (and he or she actually does work).
• You can deduct 50% of the cost of transportation to and from the venue where the meal is consumed. Denver to Aspen on United to eat at Jimmy’s. Seems reasonable, and the meatloaf is unbelievable (who uses kobe beef for meatloaf?)!
• You can deduct 50% of the costs associated with the meal such as taxes and tips, keeping in check with lavish or extravagant. Tipping $500 at McDonald’s for the extra cheese on your Big Mac, and then asking for a kickback out back behind the dumpster is probably not good. If you do, get a receipt… we’re sure you paid a commission on the kickback (kidding!).

The IRS will be updating Section 274 to reflect the interpretations above. Congress butchered it with crayon, and it needs a makeover. “Makeover: IRS Style” That is must-see TV right there!

Jason Watson, CPA is the Managing Partner of WCG (formerly Watson CPA Group), a business consultation and tax preparation firm, and is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps which is available online.