Editorial · March 21, 2019
Business Meals Deduction: What the 50 Percent Rule Covers
Business meals deduction rules changed for 2018, and many owners are still sorting out what they mean. The short answer is simple. Entertainment is no longer deductible. Most business meals still are, at 50 percent of the cost.
What the new law changed
Congress passed Public Law 115-97, known as the Tax Cuts and Jobs Act, in December 2017. It changed section 274 of the tax code. Before the change, a business could deduct half the cost of entertainment if it was tied to the business. That meant things like tickets, club fees and outings with clients.
The new law repealed that exception. Entertainment costs are no longer deductible. The law did not say what should happen to meals, and that left a gap. Owners and tax pros asked whether a client dinner now counted as entertainment.
Sources: IRS Notice 2018-76, "Expenses for Business Meals Under Section 274."
What the IRS said in October 2018
The IRS answered in Notice 2018-76. It said that otherwise allowable meal expenses stay deductible, subject to the 50 percent limit. It pointed to the House and Senate conference report, which said taxpayers can keep deducting half of the food and drink costs of running a business.
The notice is interim guidance. The IRS and the Treasury said they plan to publish proposed rules later. Until those rules take effect, taxpayers may rely on the notice.
Sources: IRS Notice 2018-76.
The five tests for a 50 percent deduction
Under the notice, you may deduct 50 percent of a business meal if all five of these are true.
- The cost is an ordinary and necessary business expense.
- The cost is not lavish or extravagant for the situation.
- You, or one of your employees, is present when the food or drink is served.
- The food and drink go to a current or possible customer, client, consultant or similar business contact.
- If the meal is at an entertainment event, the food is bought separately, or its cost is listed separately on the bill or receipt.
The last test matters most for events. The notice warns that you cannot get around the entertainment ban by inflating the food charge. An honest, separate price is the point.
Sources: IRS Notice 2018-76.
Three examples from the notice
The IRS gives examples of its own. In the first, a business owner takes a contact to a baseball game. The tickets are entertainment, so none of that cost is deductible. The owner buys hot dogs and drinks at the game. Because those were bought apart from the tickets, half of that cost is deductible.
In the second, the owner buys tickets for a suite, and the invoice includes food and drink in one price. Nothing is deductible, because the food was not bought separately and was not listed on its own line.
The third uses the same suite, but the invoice lists the food and drink as a separate charge. Now half of the food and drink cost is deductible. The tickets still are not.
Sources: IRS Notice 2018-76, Examples 1 through 3.
Keep good records
The 50 percent limit and the entertainment ban are separate rules, and both need paperwork. The IRS has long said that you must be able to prove travel and meal costs. Its Publication 463 lists the usual proof: the amount, the time and place, the business purpose, and who you met with. Keep the receipt, and note on it who was there and why.
When you book an event, ask for an itemized bill. If food and tickets come in one price, ask the seller to split them. A receipt that shows the food on its own line is what the third example turns on.
Some questions are still open. The IRS has said it will write more guidance on meals provided to employees at the workplace, and the notice invites public comments. Check with a tax adviser before you rely on a gray-area meal.
Sources: IRS Publication 463 (2017), "Travel, Entertainment, Gift, and Car Expenses"; IRS Notice 2018-76.
The bottom line
Keep taking clients to lunch, and keep deducting half. Skip the deduction for the game, the show or the club fee. Make sure every receipt can be read at a glance, and that the food is priced apart from any entertainment.