Q&A WITH JOSH MULLINS
IRS treats business entertainment, meals deductions differently
Q: On Oct. 3, the IRS issued interim guidance regarding the meals and entertainment deduction for business expenses incurred after 2017. Are meals and entertainment still an allowable business deduction for tax purposes?
A: To answer this we must separate the two items and examine them individually because the IRS treats each differently.
Q: Are entertainment expenses an allowable business deduction for tax purposes?
A: The Tax Cuts and Jobs Act amended Section 274 and the new law no longer allows for a deduction of items considered to be entertainment, amusement or recreation.
Q: What events are considered to be entertainment, amusement or recreation?
A: Per the Interim Guidance issued by the IRS and Section 1.274-2(b)(1)(i) of the Internal Revenue Code, items “such as entertaining at nightclubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family. The term ‘entertainment’ may include an activity, the cost of which is claimed as a business expense by the taxpayer, which satisfies the personal, living, or family needs of any individual, such as providing food and beverages, a hotel suite, or an automobile to a business customer or the customer’s family.” Keep in mind that this is in the context that the expense is an expense for the purpose of entertaining.
Q: Are meal expenses an allowable business deduction for tax purposes?
A: Per the guidance the IRS has issued, there are five factors that all must be met if a business meal is to be allowed. Also, business meals are still only allowed a 50 percent deduction for tax purposes. Here are the five tests per the IRS guidance issued on Oct. 3.
• The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business
• The expense is not lavish or extravagant under the circumstances
• The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages
• The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact
• In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts
The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Q: How does the new law regarding meals and entertainment differ from the deductions allowed in previous years?
A: Previously, the law gave us only two items to consider for determining if a meal was a business meal and deductible for tax purposes. Those two were that the meal not be lavish or extravagant and that the taxpayer be present at the furnishing of the meal. As for entertainment, under the old law you could deduct 50 percent of ordinary and necessary expenses to entertain a client, customer, or employee if the expenses me either the directly related or associated test. To meet the directly related test the entertainment needed to have taken place in a clear business setting or the main purpose of the entertainment was to conduct business with the person you were with and you had a reasonable expectation that you would receive some specific business benefit. To meet the associated test the entertainment expense needed to be associated with your business and business must have been conducted directly before or after the entertainment occurred.
PAULA BURKES,