New Guidance Demystifies Meal Deduction Rules
There was big news at the end of 2017 that tax reform had passed and was signed into law. Formally known as the Tax Cuts and Jobs Act (TCJA) it made significant changes to the tax code designed to make it more streamlined and business friendly. Several of the most popular changes include a reduction in the overall tax rate, introduction of the Qualified Business Income Deduction and more liberal asset depreciation guidelines. However, one change that was less welcome by business owners was the elimination of the deduction for entertainment expenses. To further confuse the situation, the law didn’t address meal and drink expenses served during such events and whether they are deductible. The good news is the IRS has finally answered the question in IRS Notice 2018-76, and provided much needed guidance. To help clients, prospects and others understand the changes and impacts on their company, Hanson & CO has provided a summary of key details below.
Key Details on Meal Deductions
Under interim regulations, taxpayer may deduct 50% of an allowable business expense meal assuming the following conditions are met:
The expense must be necessary and ordinary under Section 162(a) paid or incurred during the tax year when involved in business.
The meal expense is not considered lavish or extravagant under the circumstances.
The taxpayer, or employee of the taxpayer is present when the food or beverages are furnished.
The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
Food and beverages provided during an entertainment activity must be purchased separately from the activity, or the cost of the food and beverages must be separately itemized from the cost of entertainment on one more bills, invoices or receipts.
Recordkeeping is Essential
It’s clear from the last bullet point that maintaining detailed records will be the key to substantiation. The IRS stated in the interim guidance, “The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.” It’s obvious from this statement the IRS is going to pay careful attention to records and scrutinize all expenses seeking the required substantiation. This is an important change for Denver companies to be aware of because prior regulations did not require such substantiation. It’s key to update company policies on meal expensing and documentation to align with the new guidance.
The good news for Denver business owners is they can deduct 50% of the meals and drinks purchased during qualifying entertainment events. This clarification by the IRS provides a collective sigh of relief for many who were uncertain about these expenses. If you have questions about the guidance, it’s impact on your policies, or need assistance with an accounting or tax issue, Hanson & CO can help! For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.