By Bonnie Scotella, CPA, MST – Senior Tax Manager, Doeren Mayhew

Before 2018, businesses could deduct 50 percent of business-related meal and entertainment expenses. However, the Tax Cuts and Jobs Act (TCJA) eliminated the deduction for entertainment expenses incurred after 2017. Business-related meal expenses, on the other hand, remain 50 percent deductible. This raised important questions – Are food and beverages purchased while entertaining clients and customers still deductible? Are they considered entertainment expenses or business-related meal expenses?

The Good News

Due to the uncertainty surrounding this time-honored, well used and legitimate business practice of wining and dining clients, the Internal Revenue Service (IRS) has recently provided us the answer to these questions, and it’s good news. Although the TCJA eliminated the deduction for entertainment expenses, food and beverages purchased while entertaining clients continue to be 50 percent deductible under the longstanding requirements. There is a catch – they have to be purchased separately or stated separately on the bill, invoice or receipt.

For example, if you take a customer to a ball game and purchase tickets in a suite where food and beverages are provided, none of the ticket cost is deductible unless the cost of the food and beverages is stated separately on the bill, invoice or receipt. In that case, 50 percent of the food and beverage costs are deductible, while the rest of the ticket cost is a nondeductible entertainment expense. The IRS warns the entertainment disallowance rule cannot be circumvented by inflating the amount charged for food and beverages. This pretty well means that it’s business as usual for these types of entertainment-related meal expenses, with the added separation requirements of course.

Defining Entertainment

The definition of entertainment remains the same as under prior law and includes entertainment, amusement or recreation expenses for clients and business associates. Your business entertainment expenses might include activities, such as theater, sports and concert tickets, golf, sporting events like hunting, vacations and similar trips.

It’s important to remember that the longstanding rules for entertainment-related meals continue to apply—namely, to be 50 percent deductible. In order to qualify for the deduction the below must be true:

  • The expenses must not be lavish.
  • You or one of your employees must be present at the event.
  • The person being entertained must be a current or potential business customer, client, consultant or similar business contact.
  • Business must be conducted during the event (or immediately before or after) and the time, place, business purpose and business relationship of the attendees must be documented.

Keeping Your Records Straight

With the above law changes, it is now necessary to separate business meals and entertainment expenses as they are accorded different treatment under the new tax law. Doeren Mayhew recommends you open a separate general ledger account for entertainment expenses and a separate account for business meals – they should no longer be combined in one account. If you chose not to do so, you will need to devise a method to provide your tax advisors with the amount incurred for entertainment separately from business meals so your tax returns can be prepared properly.