With such sweeping changes coming in with that Tax Cuts and Jobs Act (TCJA), there has been a fair amount of confusion with how certain deductions are handled. In particular, there are frequent questions about how entertainment and client meal expenses are handled.
Before TCJA, companies for the most part could deduct 50 percent of these expenses for business-related meal and entertainment purposes. In addition, if the meal was provided by the employer on the employer’s property it was 100 percent deductible.
Not so anymore.
Under the new law, any entertainment expenses incurred or purchased after Dec. 31, 2017 are not deductible. Meals provided by the employer (i.e. food and beverages provided on-site or provided through a cafeteria operated by the company) on the employer’s property are reduced to a 50 percent deduction.
The following summaries by Tax Connections provide the fine print details of how these changes will work:
Disallowance of Deduction for all Entertainment, Amusement, and Recreation Expenses. Prior to TCJA, entertainment, amusement, and recreation expenses could be deducted (subject to certain restrictions) to the extent the taxpayer could “establish that the item was directly related to, or in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such an item was associated with, the active conduct of the taxpayer’s trade or business.” TCJA §13304(a) fully repealed the deductibility of these items, regardless of any proximate business purpose.
Disallowance of Deduction for Entertainment Tickets, Skyboxes, etc. Prior §274(l) placed further restrictions on the deductibility of entertainment tickets and box suites. 274(l) was fully repealed by TCJA due to the blanket, 100% disallowance of these types of expenses.
De Minimis Fringe Eating Facilities Now Subject to 50% Disallowance. Prior §274(n)(2)(B) provided that expenses for food and beverage that were excluded from gross income of the recipient under §132(e) were not subject to the general 50% meals and entertainment disallowance under §274(n)(1). This provision was repealed by TCJA, thereby making such expenses now subject to the general 50% limitation.
No Deduction for Meals Provided for Convenience of Employer after 12/31/2025. Effective January 1, 2026, new §274(o) provides that no deduction is allowed for any expense for a de minimis fringe eating facility (§132(e)) or any meal provided for the convenience of the employer (under §119(a)).
There are some exceptions to these disallowances that Tax Connections notes, and they’re worth considering. For example, in order for meals expense to be deductible, it must first pass muster as ‘ordinary and necessary’ under §162 or §212. In addition, the expense must be directly related to or associated with the business or have a business purpose. If the meal is for goodwill or to make a client view your company favorably, rather than having a direct business purpose, such as a sales pitch, the expense will not be deductible.
In general, for all meals expenses, proper documentation that provides an explanation of the business purpose for each event should be retained. With that in mind, the following items are generally 100% deductible:
Recreational activities and/or facilities furnished primarily for the benefit of employees for recreational, social, or similar activities. An example of this would be a holiday party for your office or taking your employees to a sporting event. However, this exception does not apply if the purpose of the event is primarily for the benefit of officers, highly compensated employees, or shareholders.
Lodging and facilities charges (excluding meals) for business meetings or business travel, such as hotel rooms and conference facilities.
Any expenses that are treated as compensation to the recipient (i.e., an employee per diem meal allowance).
In addition, the following would be examples of expenses subject to the 50% limitation §274(n):
Food and beverages provided for employees on the employer’s business premises, such as in a cafeteria.
Meals provided at a shareholder or employee business meeting.
Meals for officers or employees traveling for business purposes.
Meals provided during business meetings held with clients. However, in order for the expense to qualify as a business expense, a business purpose for the meeting must be documented, and the taxpayer or an officer, owner, or employee of the taxpayer must be present for the meal. There is also a “reasonableness” test associated with this limitation and the expense should not be considered “lavish or extravagant.”
This article only highlights some key points of this topic and does not constitute comprehensive or actionable advice of any sort. It is imperitive that you consult with your own legal and tax professionals before strategizing your business expenses and tax deductions.
Do you have the support you need to manage your small business bookkeeping?
Schedule a 30-minute appointment to speak with a local small business adviser.