Yes, the business meal is still deductible
As I sit writing and watching a thunder and lightning storm, my thoughts naturally turn to Ben Franklin. Ben told us that the only things in life that are certain are death and taxes. Years later, humor writer Dave Barry clarified that the difference is that death doesn’t get worse every time Congress meets.
Old movies and television shows reflected a tradition of nattily dressed business people eating meals at fancy places as they discussed some big business deal. They would often remind their guest that this meal was tax deductible.
President Jimmy (a name that only my uncle called me, and he stopped when I reached puberty) Carter reflected on this phenomenon and declared that business people should not be able to deduct the wellknown “three martini lunch.”
So the movement started by President Carter later turned into a limit of 80 percent of the cost of otherwise deductible business meals, an outcome tax advisers called the 2.4 martini lunch.
This was later turned into a limit of only 50 percent of the cost of the meal. Not only that, but the law was changed to say (1) no deduction at all without specific substantiation and (2) no deduction, with or without substantiation, for “goodwill” type meals.
So we then had rules we could understand. Meals were deductible if they were either “directly connected” with business or “associated with” business. The law denied “entertainment” deductions but carved out an exception for the two categories I just mentioned.
Like death, we had something that was certain. Ben, looking down at us with a group of his French friends, puffed with pride at the veracity of his famous words (the “penny saved” thing had lost its meaning due to inflation in the Carter era).
Then the 2017 tax act fell upon us. And this falling seemed literal for some of the provisions. One example of a crushing change was eliminating the reference to the exceptions for directly connected or associated with business entertainment.
We were then left with just a prohibition against deducting business entertainment.
But what did this mean? Tickets to a football game – that’s entertainment. But food?
You can imagine a row of IRS agents singing the 1950s song as they deny deductions with the lyrics to “That’s Entertainment,” minus, we hope, the reference to a woman as “the skirt.”
Absent the specific exception that was collateral damage in the 2017 legislation, tax experts debated the status of business meals in 2018. In Notice 2018-76 the IRS told everyone to remain calm. The old business meal rules survived the 2017 legislation.
First, recognize that an IRS notice is just that — they are symbolically posting a notice on a tree. It carries no more weight in a court adjudicating a tax dispute than the 95 theses Martin Luther posted on the Wittenberg church. Posting is posting.
But the IRS double dog swears they will not challenge a taxpayer who relies on their notice. And they also tell us that regulations are coming that will set these rules in stone. Honestly that’s a pretty good deal.
So here’s the “law” now. You can still deduct directly connected business meals. These meals are often called a “quiet business meal” because all you do is discuss business — that’s the whole point of the meal.
Associated meals either precede or follow a business discussion. So after hashing out the details of a vexing business deal, you suggest that everyone go get some food and it’s on you (not really, you’ll bill them for the expenses). But since everyone is worn out, you just discuss why the Dodgers cannot hit a home run if someone is on base.
The IRS notice has five theses. First, the meal must be ordinary and necessary in connection with your business. Second, it cannot be “lavish or extravagant.” I don’t think I’ve ever entertained in a lavish or extravagant way, although I hope someday to do so.
Third the taxpayer or an employee must be present. Fourth it must be with a current or potential business associate. Finally, if it is at an entertainment facility (e.g., a baseball game), the cost of the meal must be separately itemized.