The cup is half full for taxpayers consequently of IRS guidance published October 3 on the deduction for business meals. The IRS signaled that 50 percent of business-food expenses remain deductible in the wake of the new tax law known as the Tax Cuts and Jobs Act (TCJA). While a few additional conditions are put into support the 50 percent deduction, this form of customer goodwill can continue without dilution essentially.
Furthermore, taxpayers can also maintain the 50 percent deduction for business meals incurred at entertainment venues with proper planning. Expenditures for both meals and entertainment were 50 percent deductible prior to the TCJA. The distinction of meals from entertainment expenses was not critical before the TJCA because in any event, the trouble was 50 percent deductible and the deduction requirements for entertainment expenses normally were met for meals expenses anyway.
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But the TCJA repealed the 50 percent deduction for entertainment expenses after Dec. 31, 2017, which makes the potential difference critical now. If meals expenses are a subset of entertainment expenses, then meals expenses (like the vast group of client business meals) are usually nondeductible under the TJCA. Various exceptions apply for certain types of meals expenditures, but there is no exception for customer business meals. Taxpayers were rightfully worried about the status of the important deduction under the TCJA. Meals expenses could have been viewed as part of entertainment expenditures prior to the TCJA.
Fortunately for taxpayers, the IRS did not take this view. In any event, the IRS didn’t confront the 1962 legislative background or the build of the law concerning its exceptions. 50 percent of meals expenses and may deduct 50 percent of entertainment expenses that met the directly related or business discussion exceptions.” This IRS position obviously distinguishes meals expenses from entertainment expenses under prior law. This taxpayer-friendly position sets up the foundation for the existing guidance.
The first condition was implicit under the last law. The next and third conditions explicitly were area of the previous rules. So, the fourth and fifth conditions are the new components of a 50-percent deductible client business meal expense. Taxpayers meeting these conditions can rely on the IRS guidance to support the 50 percent deduction until the guidance is replaced with regulations.
In order to maximize the 50 percent deduction for foods expenditures, taxpayers must analyze preparations at entertainment locations to ensure compliance with the fifth condition. The IRS assistance is welcome news to taxpayers because it resolves a significant ambiguity about the TCJA favorably. Taxpayers should evaluate any entertainment-related expenses to determine whether changes to documents and invoicing are necessary to increase the 50 percent foods deduction. To find out more about the 50 percent client business meals deduction and the many rules for other meals expenditures, please contact your neighborhood CBIZ MHM taxes professional.