It’s been more than a year since the Tax Cuts and Jobs Act was signed into law, but some questions still remain about how exactly the provisions play out. Take the business meal deduction. While the entertainment deduction was entirely eliminated in the TCJA (sorry, box seats and tee times), the new law wasn’t clear on where that left business meals. In October, the IRS provided some “transitional guidance” for businesses, but also said it intends to publish proposed regulations that will serve as the final say.
New Rules for Meals with Clients
In the transitional guidance, the IRS clarified that meals, including food and drink, are still 50 percent deductible when they meet certain criteria:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when 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 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; and
- For food and beverages provided during or at an entertainment activity, they 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.
Changes for Meals for Employees, Too
In terms of meals provided to employees, the TCJA also made some changes but also left a couple of things the same:
- Holiday parties are still fully deductible.
- Any food and drinks available to the public (such as mints and the coffee station in your lobby) are still fully deductible.
- Employee meals with traveling and meals provided at meetings are still 50 percent deductible.
Here’s where things changed:
- De minimis fringe benefits, such as break room snacks and drinks, are now 50% deductible and will be nondeductible after 2025.
- Meals provided to employees on business premises as a matter of convenience are 50% deductible and will be nondeductible after 2025.
What This Means for Your Business
Because entertainment and meals can no longer be treated similarly, this change in the tax code is creating more work for your accounting staff.
“Previously, there was no real reason to separate line items on a bill between the two categories,” explains Josh Farber, XMI’s chief financial officer. “Meals and entertainment were one in the same. But now, in order to facilitate tax deduction, each invoice should be scrutinized and split between the two. That’s going to require accountants to pay special attention, where they might not have needed to before.”
Further, he said, it’s important to remind employees to be diligent about getting itemized receipts when entertainment and meals are potentially combined.
As for meals provided to employees, Michelle Thompson, XMI’s human resources director, says there’s no reason to stop offering these types of perks now that there’s less of a tax incentive to do so.
“If businesses want to retain employees and be a preferred place to work, it is important to keep these benefits in place. More and more employers are going the extra mile to provide a fun work atmosphere. And if you ask employees, meals, snacks and employee entertainment equal fun at work.”