The Internal Revenue Service (IRS) has issued final regulations on the business expense deductions for meals and entertainment implementing provisions of the Tax Cuts and Jobs Act.

In general, tax reform eliminated the deduction for expenses related to entertainment, amusement or recreational activities. With the new guidance, comes clarity for business owners on what can be deducted related to these activities, as well as how to treat the business deductions for food and beverages that remain deductible.

Entertainment Expenses

The final regulations generally kept the existing definition of entertainment. Similarly, the final regulations confirm the nine exceptions to entertainment expenses remain the same, which include:

  1. Food and beverages for employees furnished on the business premises.
  2. Expenses for services, goods and facilities treated as compensation and as wages for withholding tax purposes, but if the recipient is a specified individual such as an officer, director or 10% shareholder or related person, the employer’s deduction is limited to the compensation reported.
  3. Reimbursed expenses, but only:
    • If the services relating to the expenses are performed for an employer that has not treated the expenses as wages subject to withholding.
    • If the services are performed for a person other than an employer and the taxpayer incurring the reimbursed expenses accounts to that person.
  4. Recreational expenses primarily for employees who are not highly compensated (e.g., a company picnic).
  5. Expenses of employees’, stockholders’, agents’ or directors’ business meetings.
  6. Expenses directly related and necessary to attendance at a business meeting of a tax-exempt business league, including a real estate board, chamber of commerce or board of trade.
  7. Expenses for goods, services and facilities made available to the public.
  8. Expenses for entertainment sold to customers in a bona fide transaction for adequate consideration.
  9. Expenses for goods, services and facilities furnished to a nonemployee as entertainment, amusement or recreation and are includible in the recipient’s income as compensation for services or as a taxable prize or award.

It also clarifies “entertainment” does not include food or beverages unless they are provided at or during an entertainment activity, and their costs are not separately stated from the entertainment costs.

Food and Beverage Expenses

The final regulations apply the guidance in the proposed regulations to food and beverage expenses allowing taxpayers to deduct 50% of business meal expenses if it can meet the following criteria:

  • The expense is an ordinary and necessary business expense.
  • It is not lavish or extravagant, and an employee/taxpayer is present when the food or beverage is furnished.
  • The food or beverage is provided to a current or potential business customer, client, consultant or similar business contact.
  • Any food and beverages provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.

It also clarifies separate charges for entertainment-related food and beverages must reflect their actual cost, including delivery fees, tips and sales tax. Indirect expenses, such as transportation to the food, are not included in the actual cost.

Furthermore, food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs.

Getting the Deductions Right

Doeren Mayhew’s tax advisors are here to help. Should you have any questions about how these final regulations impact your business deductions, contact us today.