Here’s good news for business meals: the Tax Cuts and Jobs Act (TCJA) removed the “directly related and associated with” requirements from business meals. This means that business meals are once again subject to the “ordinary and necessary” business expense rules. You’re going to like these rules more than the old ones.
Restaurants and Bars
Question 1) If, for business reasons, you take a customer to a restaurant or a bar, but you do not discuss business, can you deduct the costs of the meals and drinks?
Answer 1) Yes. Even though you did not discuss the business, if the circumstances are generally considered conducive to a business discussion, you may deduct the expenses for meals and beverages to the extent they are ordinary and necessary expenses.
Question 2) What are circumstances conducive to a business discussion?
Answer 2) This depends on the facts, taking into account the surroundings in which the meals or beverages are furnished, your business, and your relationship to the person entertained. The surroundings should be such that there are no substantial distractions to the discussion.
Generally, a restaurant, a hotel dining room, or a similar place that does not involve distracting influences (i.e. sporting event or floor show) is considered conducive to a business discussion. On the other hand, business meals at nightclubs, sporting events, large cocktail parties and sizable social gatherings would not generally be conducive to a business discussion.
Meals Served in Your Home
Question 3) Does a business meal served in your home disqualify the deduction?
Answer 3) No, as long as you serve the food and beverages under circumstances conducive to a business discussion. But because you are in your home, the IRS adds that you must clearly show that the expenditure was commercially rather than socially motivated.
Question 4) If, for goodwill purposes, you take a customer and his or her spouse to lunch and don’t discuss business, will the cost of the lunch become non-deductible?
Answer 4) Not if, in light of all facts and circumstances, the surroundings are considered conducive to a business discussion, and the expenses are ordinary and necessary expenses of carrying on the business rather than socially motivated expenses.
Question 5) Is the situation the same if the taxpayer’s spouse accompanies the taxpayer at a dinner for business goodwill reasons?
Answer 5) Yes, the meal is still deductible. This is true whether or not the customer’s spouse is present. Again, the meal must meet the ordinary and necessary business expense standards.
Document the Meal Deductions
You need to keep records that prove your business meals are ordinary and necessary business expenses. You can accomplish this by keeping the following:
- Receipts that show the purchases (food and drinks consumed)
- Proof of payment (credit card receipt/statement or canceled check)
- Note of the name of the person or persons with whom you had the meals
- Record of the business reason for the meal (a short note/description)
You still deduct half the cost of your business meals for tax purposes (as before the TCJA).
If you have any questions, need more information or need help with record-keeping, please get in touch with us!
Helping you stay informed,
-Heritage Accounting and Tax Services