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MEAL AND ENTERTAINMENT – RULES FOR BUSINSS DEDUCTIONS CLARIFIED BY THE IRS

The Internal Revenue service drew a hard line to illuminate the difference between meals vs. entertainment as a business deduction by issuing IRS Notice 2018-76.  This clarification (which was requested by the American Institute of Certified Public Accountants back in April) is a welcome clarification of the tax law that will apply to your 2018 tax filings.

ENTERTAINMENT EXPENSES NON DEDUCTALE

In general, all entertainment expense associated with your business are non -deductible.  Examples of non-deductible entertainment expenses are “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, 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”.

BUSINESS MEALS

Pursuant to this recent pronouncement taxpayers may deduct 50% of a business meal if:

  1. 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;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. 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

Executive Summary

Entertainment expenses for business purposes are non-deductible.

Recreational expenses principally for the benefit of employees are 100% deductible.

Expenses for food and beverages furnished on business premises of the taxpayer primarily for his employees are 50% deductible.

Meals provided in conjunction with carrying on any trade or business are 50% deductible.

Expenses incurred by a taxpayer directly related to business meetings of his employees, stockholders, agents and directors are 50% deductible.

Expenses directly related and necessary to attendance at business leagues, chamber of commerce (any organization described in IRC Section 501(c)(6)) are 50 % deductible.

Special Commentary: 

The ability to deduct expenses need to be supported by documentary evidence.  Remember the 4 W’s. Under examination by the IRS documentation of the expense specifying the rational of the business expense (Who, What Where and Why) needs to be evidenced in order for the expense to be considered a valid deduction.

 

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