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National Restaurant Association - Taxpayers can deduct 50 percent of their business meal spending, IRS confirms

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Taxpayers can deduct 50 percent of their business meal spending, IRS confirms

Restaurants open their doors to business guests every day, but may not be closely attuned to laws on the tax treatment of business meals.

The issue has been in the spotlight recently. The 2017 tax reform law eliminated some deductions for client entertainment but didn't spell out when or whether business meals might be considered “entertainment.”

The Internal Revenue Service recently stepped in with an answer: Businesses can generally continue to deduct 50 percent of the cost of meals while entertaining clients, the agency said in transitional guidance published in early October.

Tax experts, businesses, the National Restaurant Association and others have been asking the Treasury Department to clarify this question ever since Congress enacted the Tax Cuts and Jobs Act in December 2017. The law eliminated the deductibility of business entertainment expenses as of Jan. 1, 2018, but wasn't clear on the deductibility of food and beverages provided at or during an entertainment activity.

The IRS’s October guidance confirms that spending on meals associated with the conduct of business generally remains 50 percent deductible. However, the IRS noted that to remain deductible, food and beverages must be purchased separately from the entertainment or costs must be stated separately from entertainment costs on receipts or invoices.

The IRS plans to publish rules in the future to clarify the definition of entertainment and explain when meal expenses may be a nondeductible entertainment expense and when they are 50 percent deductible expenses. Until those rules take effect, the agency says taxpayers can rely on the October guidance.

6 questions about business meals

As your guests work to stay on the right side of the law when they invite clients to discuss business over a restaurant lunch or dinner, here’s some insight into the questions they may be asking.

1.    Can businesses deduct the cost of taking customers, vendors or potential employees out for a meal?
Yes. Meals for business purposes are a legitimate business tax deduction, just like all other “ordinary and necessary” expenses incurred in carrying on a trade or business. Taxpayers are generally entitled to deduct 50 percent of the food and beverage expenses associated with meals provided to current or potential business customers, clients or other business contacts.

2.    What makes a business meal tax-deductible?
According to the IRS’s October guidance, business taxpayers are allowed to deduct up to 50 percent of their business-meal expenses if these conditions are met:

  •  The expense is an ordinary and necessary expense associated with carrying on a trade or business;
  •  The spending 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 similar business contact; and
  • 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.

3.    What records should taxpayers keep to document business-meal spending?
Businesses must be able to document that business-meal spending is directly related to or associated with the business or trade. A business should keep records that can prove how much was spent; the time, date and place of the meal or spending; the business purpose of the meal; and the people who participated.

4.    Can a business deduct the cost of entertaining clients?
As of Jan. 1, 2018, businesses can no longer deduct the cost of any activity that meets the definition of "entertainment, amusement or recreation." Prior to Jan. 1, 2018, a business could deduct up to half of entertainment, amusement or recreation costs if costs were directly related to the conduct of the taxpayer's business or if a "substantial and bona fide business discussion" directly preceded or followed the entertainment. Congress enacted the change as part of the 2017 Tax Cuts and Jobs Act.

5.    What are examples of nondeductible entertainment expenses?
Nondeductible entertainment expenses would include entertainment at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips. Under the new tax law, these entertainment costs are now nondeductible for a business.

6.    Are business meals ever considered “entertainment” and therefore nondeductible?
Business-meal expenses that meet the conditions outlined in the answer to Question 2, above, are generally tax-deductible. But there are some cases where spending on food and beverages could be considered nondeductible entertainment expenses. The IRS offers a few examples and says it will propose formal rules in the future:

  • Example 1: A business taxpayer invites a client to a baseball game, and buys hot dogs and drinks for himself and his client once at the stadium. In this case, the baseball tickets are considered entertainment, so the ticket costs aren't deductible. But the taxpayer can deduct up to 50 percent of the cost of the hot dogs and drinks, because these items were purchased separately from the entertainment.
  • Example 2: A business owner invites a client to a basketball game. The seats are in a suite, and the ticket cost includes food and beverages. Since the food and beverages aren't purchased separately from the game tickets, and aren't stated separately on the invoice, the entire cost is an entertainment expense and may not be deducted. (Note: If the cost of the food and beverages is stated separately on the invoice for the game tickets, the taxpayer can deduct 50 percent of the food and beverage expenses.)

Sponsored content provided by RSM, a National Restaurant Association partner. RSM provides audit, tax and consulting services to middle-market companies.

More insights from RSM:

What the 2017 tax law means for your restaurant business
The 2017 tax reform law may offer restaurant operators new opportunities to save, according to RSM. 

A tip on tips: Remember the FICA reimbursement credit
You may be eligible to claim a credit for a portion of taxes paid on employees' tips, RSM advises.

5 reasons to use the Work Opportunity Tax Credit
If you haven't used the WOTC, now is a good time to take a look, says RSM.

Restaurants gear up for sales-tax changes in wake of Supreme Court decision
Sales-tax compliance could get complicated for restaurants that file in multiple jurisdictions.

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