The Tax Cuts and Jobs Act eliminated any deduction for entertainment costs, so taking a customer to a ballgame or an associate to the theater is not deductible after 2017. Clearly the cost of meals consumed during business travel was under prior law and is under current law deductible. However, the repeal of the entertainment deduction raised doubt about the deduction for wining and dining customers, clients, vendors, employees, and other business associates.
Fortunately, the IRS has clarified the rule and it's favorable to businesses.
The cost of food and beverages is deductible when certain conditions are met:
- The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- You as the business owner or an employee of the taxpayer is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
Assuming these conditions are met, then 50% of the cost is deductible.
Entertainment and meals combined
As noted earlier, no deduction can be claimed for the cost of entertainment, regardless of whether you conduct business at it. Entertainment includes going to night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, as well as hunting, fishing, vacation, and similar trips. What happens if you take a client to an entertainment event, such as a football game, and eat and drink there?
The IRS has taken a favorable view of this. Where food and beverages are provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The IRS warns that entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Here are two examples from the IRS on meal costs:
Example #1: You take a business contact to a baseball game for which you purchase tickets. At the game, you buy hot dogs and drinks for you and your business guest. You can’t deduct the cost of the tickets, but the cost of the hot dogs and drinks are deductible (up to the 50% limit).
Example #2: You take a business contact to a basketball game and pay for tickets to attend the game in a suite where you have access to food and beverages. The cost of the tickets includes the food and beverages, so no deduction is allowed. But if the invoice for the tickets separately states the cost of food and beverages, then that portion of the invoice for the food and beverages is deductible.
The Tax Cuts and Jobs Act did not change the required substantiation rules for deducting meal costs. In order to take a deduction, you still must keep track of the date, cost, location, name and relationship of the business person in attendance, and what was discussed (e.g., a current business issue, a potential transaction, obtaining a referral). Finally, don’t forget that even if you pass all these hurdles, you still can only write off half of the cost.