Even if they’re part of an entertainment activity, you can still take tax deductions on your business meal expenses, the IRS clarified in temporary guidance issued in early October.
The tax reform law, which was enacted at the start of the year, ended deductions for business-related entertainment, amusement, or recreation but created uncertainty about whether associated meals remain partially deductible.
50 Percent Deductible
Under the temporary guidance, those meal expenses remain 50 percent deductible, but you must show that they were incurred separately from the entertainment expenses. The meal expenses are eligible, the guidance says, when “the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.”
A Win for Real Estate
The clarification is a win for real estate because business-related meal expenses are common in the industry. Based on the clarification, if you buy three baseball tickets for you and two business contacts, and during the game, you buy hot dogs and soda for the three of you, the tickets are not deductible, but the food and beverages are for all three people.
Some key points in the guidance:
The meal expense must be “ordinary and necessary,” and it must be paid or incurred in a trade or business context.
The expense must not be “lavish or extravagant” under the circumstances.
The taxpayer, or an employee of the taxpayer, must be present upon the furnishing of the food and beverages.
The food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact.
In the case of food and beverages provided during an entertainment activity, the items must be 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.