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IRS Says TCJA Allows Client and Prospect Business Meal Deductions

In Notice 2018-76, the IRS states that client and prospect business meals continue as tax deductions under the Tax Cuts and Jobs Act.

This is very good news indeed.

Overview

Under this new IRS guidance, you may deduct 50 percent of your client and prospect business meals if

1. the expense is an ordinary and necessary expense under Internal Revenue Code (IRC) Section 162(a) that is paid or incurred during the taxable year in carrying on any trade or business;
2. the expense is not lavish or extravagant under the circumstances;
3. the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
4. the food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
5. in the case of food and beverages provided during or at an entertainment activity, the food and beverages 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

Meals Separated from Entertainment

In Notice 2018-76, the IRS gives you three examples of how to deal with business meals that are incurred in combination with entertainment, as described below.

Example 1.  Taxpayer A invites B, a business contact, to a baseball game.  A purchases tickets for A and B to attend the the game.  While at the game, A buys hot dogs and drinks for A and B.

The baseball game is entertainment, and thus the cost of the game tickets is an entertainment expense and is not deductible by A.  The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subjec to the IRC Section 274(a)(1) entertainment expense disallowance.  Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2.  Taxpayer C invites D, a business contact, to a basketball game.  C purchases tickets for C and D to attend the game in a suite,  where they have access to food and beverages.  The cost of the game tickets, as stated on the invoice, includes the food and beverages.

The game is entertainment, and thus the cost of the game tickets is an entertainment expense and is not deductible by C.  The cost of the food and beverages, which are not purchaed separately from the game tickets, is not stated separately on the invoice.

Thus, the cost of the food and beverages also is an entertainment expense that is subject to IRC Section 274(a)(1) disallowance.  Therefore, C may not deduct any of the expenses associated with the game.

Example 3.  Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

As in example 2, the game is entertainment, and thus the cost the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C.  But the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the IRC Section 274(a)(1) disallowance.  Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

Documentation

To prove your business meals, follow the two easy steps below:

1. Keep the receipt that shows the name of the restaurant, the number of people at the table, and an itemized list of food and drinks consumed.
2. On the receipt, record the name or names of the person or persons with whom you had the meal and also record the business reason for the meal.

In the event that the receipt is not available, such as with the purchase of hot dogs and drinks at a baseball game while sitting in the stands, make sure to make a written note of the expenditures immediately after the game.

If you charge a business meal to a credit card, the credit card statement provides your proof of payment. When possible, always pay by credit card or write a check so that you have clear proof of payment.

Key point. Proof of payment is not proof of what you purchased, so in addition to proof of payment, keep the receipt with the notations as described earlier. With this combination of proof of payment and receipt with notations, you have what we call audit-proof documentation.

If you would like to review your business meal deductions with me, please call me on my direct line at 210-824-5611.