While the Mad Men days of three-martini lunches are a quaint relic of the past, businesses still rely on wining and dining clients as a means of sealing deals. But, if you want to entertain a longtime client or a new prospect, you have to understand that the rules have changed since the Tax Cuts and Jobs Act was passed in 2017. Valuable write-offs for meals are still available, but you can forget about entertainment.
Tickets for Broadway shows, box seats at Citizens’ Bank Park or a Sky Box at Heinz Field certainly can sweeten a deal. Or maybe you enjoy taking a client out for a round of golf. By all means, do what you think is necessary to seal the deal. Just don’t claim it as a business expense, because the TCJA has put an end to such deductions.
You are still allowed to deduct 50 percent of the cost of food and beverages for meals conducted with business associates. However, even these expenses must pass the basic test for a business-related expense:
- Ordinary and necessary — As we discussed in a previous blog, expenses must be common and appropriate for your industry. That means you shouldn’t be lavish and extravagant. If you’re trying to land a $3,000 contract, caviar and lobster washed down with Chateau Lafitte is probably a bit much.
- Directly related to or associated with your business — You must expect to receive a concrete business benefit from your expenditure. Therefore, the principal purpose for the meal must be business. You can’t throw a party, chat briefly about an account and write off half the catering bill.
Your records of meal expenses must be detailed. This means itemizing for the food and beverages, recording the date and time of the meal, and noting the business purpose. You should state in your records who was there, making sure that each person has a business purpose for participating. Your records of business meal expenses should be kept with an eye towards what the IRS would ask if they decided to audit you.
Now, what about a hybrid scenario. Say you invite a prospective client to an entertainment event, such as a Pittsburgh Steelers game. You discuss business prior to the game, touch on business again at halftime and seal the deal after game ends. You can’t deduct the cost of tickets, but what about the food and beverages?
The IRS has clarified this issue with published guidance (Notice 2018-76), allowing taxpayers to take the standard 50 percent deduction for food and drink expenses as long as the company representatives conducted business during the event, or shortly before or after. But you need to record your food-and-drink expenses “separately from the cost of the entertainment on one or more bills, invoices or receipts.”
Finally, what about providing meals to employees on your business premises? Prior to TCJA, such meals were 100 percent deductible. But now, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50 percent deductible. Enjoy that while it lasts, because after 2025, these meals won’t be deductible at all.
Meal expenses are just a small slice of your allowable business deductions. To maximize your write-offs, you should consult a knowledgeable accountant at Breon & Associates who can advise you on taxation planning for your business.
Contact Breon & Associates in Harrisburg
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