Having a business meeting over a meal or celebrating a big contract with a team happy hour are common events. Before the 2017 Tax Cut and Jobs Act (TCJA), meals and entertainment directly related to a business activity were considered a “reasonable and customary” business deduction, subject to strict rules. For example, meals and entertainment that were considered “lavish” or where the taxpayer or her employee was not present were not tax deductible.
Passing the TCJA changed all of that. Or did it? Some confusion is still out there, leading to some people thinking that meals and entertainment expenses are no longer deductible. Not true! That misunderstanding could lead to missing some business deductions, and paying higher taxes. Not good!
In reality, the new tax law is so vague it does not specifically define the expense commonly known as a “business meal.” TCJA language retains the requirement that “the taxpayer or his agent” be present for the business meal to be deductible. However, it does not retain the “directly related” and “associated with” standards that used to apply.
The change in meals and entertainment language and how it will be interpreted by taxpayers and their tax advisors has not been tested. Recommended practice under TCJA is in line with common practice pre-TCJA. So what does that mean for you?
Under TCJA, businesses can deduct 50% of the cost of meals and entertainment when:
- The taxpayer or his agent is present and conducting business.
- Expenses are not lavish or extravagant under the circumstances.
- Records are kept of the date, amount, business purpose and attendees.
These “new” requirements look a lot like what most of us have been doing since 1986, the last time tax law changed related to business meals and entertainment. So don’t worry about taking a client out to a dinner meeting. Have a team meeting at the happy hour location, and then stay for some team bonding. Keep the expenses reasonable, maintain complete records, and take that tax deduction. It’s okay.