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Understanding Recent IRS Guidance on Meals, Entertainment Expenses

Just a couple of weeks ago, the IRS released new guidance concerning business deductions for meals and entertainment expenses, which takes into account the new Tax Cuts and Jobs Act (TCJA) tax reform law passed by Congress and signed by President Trump last December.

The bill eliminated the deductions for all the entertainment expenses: things like concert tickets, cruises, golf passes or any other sporting event. As a result, there has been some confusion out there about the matter. Some people thought the whole deduction was lost. In truth, only part of the deduction has been lost. The purely entertainment part seems to be gone. However, the meals and beverages part remains, but only with attention to detail as to the proper records.

The IRS said that taxpayers can still deduct 50 percent of the costs of meals if they are not considered to be “lavish or extravagant” while entertaining current or potential business clients or customer contacts. What is considered to be lavish or extravagant will probably have to be worked out more as time goes by. However, the costs of food and beverages provided before, during or after an entertainment event must be accounted for separately and reflected on a separate receipt.

Prior to the new tax reform law, a taxpayer could deduct 50 percent of the cost of entertainment, meals and beverages as a business expenses. The issue of them not being too “lavish or extravagant” to qualify applied then, too.

Section 274 of the tax code changed all that and now disallows a business deduction for expenses for entertainment, recreational events and other amusement costs incurred while entertaining existing or potential clients or customers. But, does still allow a 50 percent deduction for meals and beverages when incurred while “wining and dining” clients. As the IRS said in a statement, “food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.”

The Tax Cuts and Jobs Act (TCJA) passed in December did not specifically address the deductibility of expenses for business meals. Because of efforts in part by professional organizations and others to get more clarification, and the confusion in general surrounding the law, the IRS issued “Notice 2018-76,” which for now can be relied on for general guidance while they work on the proposed regulations that will clarify exactly when business meal expenses are deductible and what is considered entertainment.

As an example, a meal purchased before or after an event can still be deductible if relevant to business, and it is accounted for in a separate receipt. If a sporting or other event where tickets are purchased and this ticket price includes the meals and beverages with it, then the costs of those meals is not deductible. If after the sporting event is over, and you take a business client to a meal and drink, that would be deductible.

So again, as before, as it is with all things concerning your taxes, just remember to keep good and accurate records. Keeping detailed records is still very much the order of the day. Well documented receipts where they spell out who was there, what was discussed, the date and time, and that it was for business purposes, will still – and probably always will be – very important. QCBN

By Ernie Gallardo, EA

Ernie L Gallardo, EA is an Enrolled Agent with 15 years of tax experience in the Prescott area.

A member of the American Society of Tax Problem Solvers (ASTPS), and the National Association of Tax Professionals (NATP). Gallardo is the owner of Tycho Tax Services.  He can be reached by phone/text 24/7 at 928-899-2434, email at info@TychoTaxServices.com, or at TychoTaxServices.com, and at PO BOX 112, Kirkland, AZ 86332.

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