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17 May

New Rules Muddy the Entertainment vs. Meal Expense Menu

The New Entertainment and Meal Expense Rules | Spire Group, PC

Whether to order soup or salad used to be the one of the toughest decisions made at a business dinner. Now, thanks to a lack of clarity in the Tax Cuts and Job Act (the Act), what’s deductible and what’s not has taken over the top spot.

Background

Prior to the Act, entertainment and business meal expenses could be deducted at 50 percent. And since meal expenses and entertainment expenses sat at the same table, there was never a need to question the intent of a business dinner. Pretty straightforward and simple.

Not anymore. The Act has eliminated the entertainment deduction, which gives rise to a question we never had to ask before: Is this a meal or is it entertainment? And is it a client business meal or an entertainment-related meal?

Open to Interpretation

Typically we’d look to the IRS for clarity, but there has yet to be guidance, leaving the matter – for now – open to interpretation. Some say that yes, taking a client to dinner implies entertainment. Others, including the committee that authored the Act, state there was no intention to change the rules governing business meals and how they can be deducted. But in the interest of transparent accounting, this is an issue that most would prefer not be subjective.

For now, client business meals remain 50 percent deductible if business is conducted, the taxpayer is present and the meal is deemed not lavish or extravagant. On the other hand, there is no deduction for entertainment-related meals when no business is conducted. And yes, this includes event tickets.

Questions to Ask

As we await IRS regulations, you may want to ask yourself – and have those extending the dinner invitations ask themselves – a few questions:

  • Does a meal have a legitimate business purpose? Can you state simply and clearly what that purpose is? Is there a specific issue to be solved?
  • Are you actually discussing business while you eat (and not, for instance, beforehand)?
  • Is the dinner not overly extravagant (yes, a judgment call to a degree, though your particular business should have some policies in place that guide decision-making here)?
  • Do you – the taxpayer – have a reasonable expectation that you derive income or other business as a result of the meeting?

The bottom line is that you should ask the right questions and remain diligent until the IRS serves up a decision that demystifies the issue. But that may not arrive until long after dessert.

Questions? Please contact us at 732-381-8887.

About the Author

Spire Group, PC Spire Group, PC
Spire Group, PC, one of the region’s leading full-service CPA and consulting firms, was built on the idea that you should be able to count on your CPA firm to provide sound, real-world financial advice that serves you now and into the future. Spire Group, PC is uniquely positioned to put our proven business expertise and dedication to work for you, offering an even more comprehensive set of solutions.

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