03 Nov 2020 Summary on Meal and Entertainment Tax Deductions
On Sept. 30, 2020, the IRS issued final regulations that provide guidance for meal and entertainment deductions under section 274 of the Internal Revenue Code. The following is a general summary of the final regulations. For specific application, please contact your Haynie & Company tax advisor.
|Office Holiday party or Picnic||100% Deductible if primarily for employees other than owners and highly compensated employees.|
|Client Business Meals||50% deductible (nondeductible after 2025)|
|Entertainment-related Meals||Food and beverages provided at an entertainment activity may be counted as non-deductible entertainment. However, if the food or beverages are purchased separately from the entertainment or the cost of the food or beverages is stated separately from the cost of the entertainment on bills, invoices or receipts, the cost of the food and beverages is 50% deductible. The amount separately invoiced or separately charged for food or beverage on the bill for an entertainment event must reflect the venue’s usual selling cost if they were purchased separately from the entertainment, so as to avoid inflating the food and beverage expenses to take advantage of the potential deduction.|
|Transportation to/from Restaurant for Client Business Meal||100% Deductible|
|Sporting Event Tickets||No deduction|
|Club Memberships||No deduction|
|Meals Provided for the Convenience of Employer||50% deductible (nondeductible after 2025)|
|Meals Provided to Employees Occasionally and Overtime Employee Meals||50% deductible (nondeductible after 2025)|
|Water, Coffee, and Snacks at the Office||50% deductible (nondeductible after 2025)|
|Meals in Office During Meetings of Employees, Stockholders, Agents, or Directors||50% deductible|
|Meals During Business Travel||50% deductible – if an employee and the employee’s spouse (or a self-employed individual and spouse) travel together for the employee’s business, the cost of a meal for the spouse is almost always nondeductible.|
|Meals at a Seminar or Conference, or at a Business League Event||50% deductible|
|Meals included in Charitable Sports Package||50% deductible|
|Meals Included as Taxable Compensation to Employee or Independent Contractor||100% Deductible|
|Meals Expenses Sold to a Client or Customer (or Reimbursed)||100% Deductible including where the customer is obligated to reimburse the employer for meals (usually travel meals) provided to the employees working on a customer contract.|
|Food Offered to the Public for Free (e.g., at a Seminar)||100% Deductible – If more than 50% of the food or beverage is likely to be consumed by the general public, the expenses are likely to be 100% deductible. The general public does not include employees, owners or contractors. In addition, if there is a specifically invited guest list, the invited list is not treated as members of the general public.
Restaurant or catering business may continue to deduct100% of its costs for food or beverage items, purchased in connection with preparing and providing meals to its paying customers, which are also consumed at the worksite by employees who work in the employer’s restaurant or catering business.
In order to deduct business meal expenses, the expense must be directly related to, or associated with the active conduct of a trade or business, or for the production or collection of income. A deductible expenditure is incurred in carrying on business. The repeal for entertainment expense deductions will also eliminate the deduction for meals, if the meal is entertainment related, and business is not conducted.
Documentation is still required so that a taxpayer can prove:
- The amount of the expenditure
- The time, date and place of the expenditure
- The purpose of the business discussion.
- The identification of the people who participated.
Because entertainment-related meals are now treated differently from client business meals, it may be necessary to establish new documentation procedures or information management systems in order to account for each separate category of meals. Client business meals are deductible only if they are not lavish or extravagant, and only if the taxpayer is present with the client. Because a deduction for an entertainment expenditure is now denied, it will be necessary to cause the activity at which the meal expense is incurred to not be entertainment related. For instance, it is necessary to conduct business with the client to be otherwise deductible, and the presence of substantial distractions might inhibit the business argument (e.g., meals expenses at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips.)
The following expenses remain deductible subject to the 50% limit:
- Meal expenses for business meetings of employees, stockholders, agents, and directors. Office meetings and partner meetings fall into this category. If there is no business function to the meal, it is completely non-deductible for tax purposes.
- Generally, any meals during business travel. If a portion of a business trip can be considered personal and not related to the business function of the trip, then a portion of the meals expense should also be considered personal and not deductible.
- Meals at a convention, seminar, or any type of meeting even if the meals cost is not separately stated from the cost of the event. If not separately stated, it must be calculated by the taxpayer based on reasonableness or per diem rates for that location.
- Meals with people related to the business such as clients, customers and vendors provided that there is a business purpose or some benefit to the business will result, the taxpayer is present, and the amount is not lavish or extravagant.
- Meal expenses for a company picnic or holiday party.
- Food made available to the public for free – usually as part of a promotional campaign.
- If the meals expense is included as taxable compensation to the employee or independent contractor and included on the W-2 or Form 1099, then the expense is fully deductible to the employer.
- Meals expenses that are sold to a client or customer.
Unfortunately, some business expenses remain nondeductible and need to be categorized as such. Examples include:
- Lunch with customer, client or employee without a business purpose/discussion
- Club dues; for example, country clubs, golf and athletic clubs
- Lavish or extravagant entertainment expenses
Entertainment expenses are now non-deductible as are meals associated with entertainment activities. Expenses incurred at a club organized for business, pleasure, recreation, or other social purposes are now non-deductible as well, even if related to an active trade or business.