“Meals Deduction and Tax Reform: Under the Radar?” by Toby Kaye, CPA/ABV | Senior Associate – Tax
In our recent article, Entertainment Expenses: How Will Your Business be Impacted?, we explained the changes to the business entertainment deduction under the new tax law. We will only see the full impact to the entertainment industries and the general business development culture over a few years as businesses reevaluate the feasibility of their annual entertainment budgets. Even if the business decision is that the additional after-tax cost of entertainment is a necessary cost of growing the business, watch out for more stringent internal policies to keep costs at manageable levels.
Yet the changes to the meals deductions may have an even more profound effect on the way we do business. How will your business practices be influenced by the following changes?
Employee Meals at the Employer’s Business Site
Many companies provide meals to employees at cafeterias on the business premises. Under prior tax law, these meals were granted special treatment compared to many other benefits provided by the employer, the only criteria being that the meals are provided for the convenience of the employer on the business premises. The value of the meals provided was not included in the employee’s income and the employer could fully deduct the cost of the meal.
Under the new tax law, these meals will still be exempt from employee income inclusion, but would be only 50% deductible to the employer.
Not only companies with free cafeterias will be impacted. For example, internal lunch meetings where food is delivered to the company will also be limited to 50% deductible.
The last tough bite to swallow: The 50% deduction for the employer is set to be eliminated after 2025.
Inviting a client or prospect for lunch or drinks to discuss business prospects has been a classic business development activity for decades. The cost of these meals for the businessperson and the client was 50% deductible to the payer.
Is the cost of these business development meals considered entertainment expense or meals expense? Previously only a semantics issue, the new tax law has made this question very pertinent. Entertainment expenses are not deductible, but meals are 50% deductible. On the surface, the answer seems obvious. A closer look at previous IRS guidance indicates the answer is more nuanced.
Here are some factors that may guide us on how the IRS views business development meals:
- Previously released treasury regulations defined entertainment to include the cost to satisfy a personal need of an individual such as providing food and beverages, a hotel suite or an automobile to a business customer or his family. Gifts of food were excluded from the definition, but was narrowly defined to packaged food and beverages provided for consumption at a later time, the implication being that food served ready to eat at the restaurant to the taxpayer and his client would be considered entertaining the client, not a gift.
- IRS FAQs under Revenue Ruling 63-144 repeatedly refer to meals purchased for business customers as entertainment.
- The 1986 tax reform further included meals in the business association and substantiation rules consistent with entertainment.
- The conference agreement under the 2017 tax reform confirms meals are 50% deductible if associated with operating their trade or business, but only gives one example: meals consumed by employees on work travel.
We will need to wait for IRS guidance to conclude on how the business development meals will be treated under the new tax law: both on whether they are defined as entertainment and whether the IRS will apply any administrative lenience to soften the blow.
What can you do Now?
Separately track the different types of travel, meals and entertainment expenses in your general ledger since they will be treated differently:
- Employee meals (at the office)
- Client/Prospect meals
- Other Entertainment
Reach out to your tax advisor at Apple Growth Partners to discuss these changes.
Keep your eyes out for further guidance to be sent out by Apple Growth Partners upon release by the IRS.
The information contained in this article is current through the published date and may change when regulations and other guidance are issued. Content has been vetted by Apple Growth Partners’ internal tax reform team of licensed CPAs. For more information about this content, or any other matters related to tax reform, please contact your Apple Growth Partners advisor.