Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It’s easy to think of these entertainment costs as deductible business expenses. However, due to a recent change in the tax law, many of those expenses may not be deductible.
Entertainment Expense Deduction Limited
As a general rule, your company can deduct 50 percent of the cost of meals as a business expense if specific conditions are met. However, Congress has completely eliminated the deduction for most entertainment expenses. Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met.
Under transitional guidance provided by the IRS, 50 percent of food and beverage expenses associated with operating a trade or business continue to be deductible after 2017 if the following requirements are met:
- the expense must be ordinary and necessary and paid in carrying on a trade or business;
- the expense may not be lavish or extravagant;
- the taxpayer or an employee must be present when the food or beverages are furnished;
- food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact; and
- if the food is provided during or at an entertainment activity the separate invoice requirement applies.
Questions? Call us. We can help you determine how your company’s typical meal and entertainment expenses fare under the new deduction rules and suggest changes to your meal and entertainment policies.