Be aware of changes to meal and entertainment tax deductions

With the recent changes to the tax law comes a change in the way meals and entertainment are deducted for tax purposes.

“This impacts everybody in one form or fashion, in every industry, from small businesses that pay for the occasional client dinner to multinationals that spend thousands of dollars on trips and sporting events,” says Maggie Gilmore, a partner at Clarus Partners.

She says the last time meal and entertainment deductions were changed, it came with increased scrutiny from the IRS, so it’s possible that it can become an issue should an audit be triggered.

Smart Business spoke with Gilmore about the changes to meal and entertainment deductions.

What had been the rules regarding the deduction of meals and entertainment?

In general, meals and entertainment for customers, clients and executives were 50 percent deductible on the taxpayer’s federal tax return. A 50 percent deduction was available for expenses incurred at a club if they were business-related — for example, for meals, golf, tennis, etc.

Meals while traveling for business or while attending a conference were 50 percent deductible, while meals provided for the convenience of the employer, such as providing meals to employees working late on a project, working over the weekend or other convenience reasons, were fully deductible by the business and the benefit would not be taxable income to the employee recipients.

Miscellaneous food and beverage provided to employees at the business were fully deductible for businesses as were office parties or company picnics.

What are the new rules?

The new rules have become more stringent. If a taxpayer takes a client to lunch, business must be conducted during the lunch to be tax-deductible. If a taxpayer takes a client to an entertainment event, such as a golf tournament, a musical performance, a football game or other like event, the 50 percent deduction is no longer available. No deduction is available for club-related expenses.

Meals provided for the convenience of the employer are reduced from 100 percent deductible to 50 percent deductible. Also miscellaneous food and beverage provided to employees at the business is now only 50 percent deductible. For both of these, beginning in 2026, none of the costs will be deductible as the law is currently written.

How significant are the deductions companies typically make in this regard?

The tax law treats the deductibility of meals and entertainment differently than how a company tracks cash flow and accounting records. The permanent difference between tax income and a company’s book income is a highlighted item on a business’s tax return, so it is an expense most companies have and would need to report on their tax returns.

There is now a definite demarcation line between partially deductible meals and full non-deductible entertainment. For professional service and relationship industries, client meals and entertainment expenses can be significant. Industries in which extensive customer and client entertainment is expected and facilitated will feel the impact more extensively than companies that have the occasional entertainment expense.

How can companies ensure they’re in compliance with these new rules?

Work with your accountant and your company expense manager to ensure that meals costs are being tracked separately from entertainment costs. For many companies, this will mean creating new accounts or sub-accounts, requiring additional documentation from employees submitting expense reports to document business purpose, attendees, dates incurred, etc.

When in doubt, talk with your accountant about expense deductibility, preferably before it is incurred. For example, if an employee attends a conference that has meetings, meals and entertainment, if the meal cost and entertainment cost are separately stated, a reasonable breakout of the expenses will be necessary for deductibility support documentation.

Meals and entertainment costs’ deductibility has changed in more restrictive ways. Preparing for correct tax reporting for 2018 is easier to start now than next April.

Insights Accounting is brought to you by Clarus Partners