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Meals and Entertainment deductions under TCJA

Posted by Tim Posted on Aug 08 2019

Business Meals DeductionI've received a number of questions over the past few months related to this very topic.  After going through the same song & dance over and over, it finally occured to me - BLOG IT!

 

"Directly Related and Associated With"

The good news for business meals - the TCJA (or, "Tax Cuts and Jobs Act") removed the "directly related and associated with" requirements from business meals.  How does that translate?

Let's say, for business reasons, you take a customer/client to eat at a restaurant, or even, to a bar for a few drinks, but you don't discuss business - can you deduct the cost of the meal (or drinks)?  Yep!  Even though you didn't discuss business, the law allows the deduction if the expenses are generally considered conducive to a business discussion.

So let's define what circumstances are "conducive to a business discussion".  It depends on the facts, but a good rule of thumb is to take into account the surroundings where the meal/drinks are being furnished, your business role, and the relationship you have with the person you're entertaining.  These surroundings should be free of any substantial distractions to the potential business discussion.  In plain terms, generally a restuarant, hotel dining room, or similar locale that doesn't have distracting influeces are considered conducive.

What's not conducive?  Nightclubs. Sporting Events. Large Cocktail Parties.  Concerts.  Any sizable social gathering is likely not conducive to a business discussion.

 

What about meals served in your home?

Believe it or not, you can take the deduction for meals served in your peronsal residence as long as these circumstances conducive to a business discussion.  But one caveat here, the IRS does add that you must CLEARLY show that the expenditure was commercially motivated.

 

What about "goodwill meals"?

Let's say, for goodwill purposes, you take a customer/client and his/her spouse/significant other to lunch, and you don't discuss business.  Is the presence of the "extra party" enough to disqualify the cost of that lunch?  Nope!  If the surroundings are considered conducive to a business discussion and the expenses are ordinary and necessary for carrying on the business rather than being purely socially motivated, you're still able to take the deduction.

For grins, let's add YOUR spouse or significant other to the mix.  Deductible?  Surely by now you've figured out...YES.  As long as we're meeting the "ordinary and necessary" business expense standards, and as long as the surroundings are conducive for a business discussion, the meal/beverages would be deductible.

 

The Proof is in the Pudding (or...Documentation)

Burden of proof always seems tricky for people.  I can tell you countless times I've had to sit beside a client under audit trying to reconstruct business lunches with their appointment calendar on the left, and the credit card statement on the right.  This type of "reconstruction" is dangerous, at best and one where that "ordinary and necessary" is applied rather stringently.  My encouragement is to:

1. Keep receipts that show the purchases (to establish meals/beverages consumed)
2. Proof of payment (typically credit card statements suffice here - or the signature copy)
3. Note the name of the person(s) in attendance directly on the receipt
4. Note the business reason for the meal - nothing fancy, just enough to describe that business reason.

There are any number of apps on the market, for those more inclined to NOT keep receipts in shoeboxes, that will keep these records for you.  My only recommendation - make sure your app is cloud-based and backed-up.  You don't want a phone mishap wiping out your records the week before an audit...trust me.

Yes, business meals are still deductible...just keep your records, and keep going to places conducive to a business discussion!  If you have any questions or would like more information, comment below or message me here.