The Tax Cuts and Jobs Act (TCJA) passed in 2017 eliminated the deduction for business entertainment expenses while keeping the deduction for business meals.
Before 2018 the IRS allowed deductions for entertainment expenses when they were related to the successful conduct of a trade or business. You could take an employee, client or prospect to an event, and if there was a business discussion, you could deduct the expenses for tickets, food, beverages, and other related costs. Now, you can’t deduct those expenses on your business tax return for anything that the IRS calls entertainment, amusement, or recreation. Click Here for more information.
There are exceptions in the guidance provided by the IRS. They will allow some entertainment expenses if it is related to the taxpayer’s trade or business. For example, theater critics can expense the cost of a ticket to a play, since they will be writing reviews or articles afterward. Similarly, when a dress manufacturer organizes a fashion show to introduce its products to store buyers, the show would be considered an allowable expense. In contrast, if an appliance distributor conducts a fashion show for its retailers, the fashion show would be regarded as a non-deductible entertainment expense.
The cost of business meals is deductible but note that it is only 50% of the amount paid. The rate was reduced in 1994 after the passage of the Deficit Reduction Act of 1993, as a means of increasing tax revenues and limiting the amount businesses were spending on meals and entertainment.
The IRS cites five specific criteria for a business to take the deduction:
- The expense is an ordinary and necessary expense paid or incurred carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, 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 a similar business contact; and
- Food and beverages provided during or at an entertainment activity, where 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, are deductible. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Here are some examples of how the IRS rules have been interpreted.
Restaurants and Bars
Question 1. If, for business reasons, you take a customer for a meal at a restaurant or hotel, or to a bar for a few drinks, but you do not discuss business, can you deduct the costs of the meals and drinks?
Answer 1. Yes. Even though you did not discuss business, the law provides that if the circumstances are of a type generally considered conducive to a business discussion, you may deduct the expenses for meals and beverages to the extent they are ordinary and necessary expenses.
Consider this “no discussion” meal a “quiet business meal.”
Question 2. What are the circumstances conducive to a business discussion?
Answer 2. This depends on the facts, considering the surroundings in which the meals or beverages are furnished, your business, and your relationship to the person you are dining with. The surroundings should be such that there are no substantial distractions to the discussion.
Generally, a restaurant, a hotel dining room, or a similar place that does not involve distracting influences, such as a floor show, is considered conducive to a business discussion. On the other hand, business meals at nightclubs, sporting events, large cocktail parties, and sizable social gatherings would generally not be conducive to a business discussion.
Meals Served in Your Home
Question 3. Does a business meal served in your home disqualify the deduction?
Answer 3. Not if you serve the food and beverages under the circumstances conducive to a business discussion. Because you are in your home, the IRS adds that you must clearly show that the expenditure was commercially rather than socially motivated.
Question 4. If, for goodwill purposes, you take a customer and his or her spouse to lunch and don’t discuss business, will the cost of the lunch be deductible?
Answer 4. Yes, if the surroundings are conducive to a business discussion, and the expenses are ordinary and necessary expenses of carrying on the business rather than socially motivated expenses. Like many examples provided by the IRS, you have to consider the facts and circumstances.
Question 5. Is the situation the same if the taxpayer’s spouse accompanies the taxpayer at a dinner for business goodwill reasons?
Answer 5. Yes, the meal is deductible. This is true whether or not the customer’s spouse is present. Again, the meal must meet the ordinary and necessary business expense standards.
Meals at an Entertainment Event
Question 6. You purchase the tickets and take your client to a baseball game. While at the game, you buy hot dogs and drinks for the client and yourself. Can any of the expenses be deducted?
Answer 6. The baseball game is defined as entertainment, so the cost of the tickets, parking, and related expenses, cannot be deducted. The hot dogs and drinks are a business meal, therefore that cost is deductible.
Question 7. You purchase a suite at a football game and invite a group of clients. The cost of the game tickets, as indicated on the invoice, includes food and beverages. What expenses are deductible?
Answer 7. No expenses are deductible. The tickets to the football game are an entertainment expense, and since the food and beverages were not purchased separately, there is no allowable deduction.
Question 8. Same circumstances as Question 7, but the invoice for the suite specifically lists the cost of the game tickets and the cost of food and beverages. Now are the food and beverage expenses deductible?
Answer 8. As before, the cost of the game tickets is not deductible, but the food and beverages, since they were itemized and separately stated, is a business meal expense and deductible.
Remember, only 50% of the cost of business meals are deductible.
Document the Meal Deductions
Always keep the following records that prove your business meals are ordinary and necessary business expenses:
- Receipts that show the purchases (food and beverages consumed)
- Proof of payment (credit card receipt/statement or canceled check)
- List of name(s) with whom you had the meals and/or drinks
- Record of the business reason for the meal (a short note—approximately seven words or fewer)
For more information on the deductibility of entertainment and meal expenses, check out these articles:
- Deducting Meals (Not Entertainment) as Business Expenses
- IRS says business meals are tax-deductible
- Meals continue to be deductible under new IRS guidance
Also, check out my other small business blog articles: