The Tax Cuts and Jobs Act (TCJA) made some changes to the deductibility of meals & entertainment expenses for the year beginning January 1, 2018. These changes caused some ambiguity over whether certain meals were 50% deductible or nondeductible.

Under the prior law, an employer could deduct 100% of the cost of providing food and beverages to employees on the business premises for the convenience of the employer. Under TCJA, the amounts incurred or paid after December 31, 2017 will be subject to a 50% limit on the deductibility of these business meals. Such amounts incurred and paid after December 31, 2025 will no longer be deductible.

Business-related meals and entertainment under the prior law were allowed a 50% deduction. The business-related food and beverage expenses and entertainment expenses had to be associated with operating their trade or business, such as meals consumed by employees on work travel or entertaining clients.

The TCJA disallows the 50% deduction for entertainment, amusement, or recreation that are directly related to the business, except for the benefit of employees - like office parties. This includes deductions for the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.

When the TCJA disallowed the 50% deduction for entertainment, there was some confusion as to whether this applied to the meals associated with the entertainment expense. Some guidance has been issued under Notice 2018-76 that clarifies that taxpayers can generally continue to deduct 50% of food and beverage expenses associated with their trade or business. This is the case if (1) the expenses are ordinary and necessary, (2) the expenses are not lavish or extravagant, (3) the taxpayer, or an employee of the taxpayer, is present when food or beverages are provided, (4) food or beverages are provided to a current or potential business customer, client, consultant, or similar business contact, and (5) food or beverages are purchased separately from entertainment (or stated separately on one or more bills, invoices, or receipts).

The Doty Group is a full-service CPA firm offering Tax, Audit, Valuation, and Advisory Services to Business and Individuals in Tacoma, WA. If you have more questions regarding this or other Tax Reform matters, please give us a call at (253) 830-5450 or e-mail info@dotygroupcpas.com.