New limitations on meal and entertainment expenses

Under the 2017 tax reform reconciliation act — also referred to as the Tax Cut and Jobs Act (TCJA) — meals and entertainment expenses incurred or paid after Dec. 31, 2017, may be subject to new limitations.

Overall, there are fewer deductions available now — including the elimination of the entertainment-expense deduction, which impacts entertainment meals. Taxpayers, including tax-exempt organizations reporting unrelated business income, will want to ensure they’re classifying these expenses properly and applying the appropriate limitation.

Nondeductible

Prior to tax reform, taxpayers were allowed a 50% deduction for expenses related to all business meals that weren’t lavish or extravagant under the circumstances if the taxpayer or an employee was present. Under the new law, however, entertainment expenses associated with a taxpayer’s trade or business are nondeductible — even if the taxpayer pays for the meal.

Food and beverage expenses incurred before, during, or after an entertainment event can retain the 50% deduction, however, as long as they’re either:

• Separately purchased from the entertainment
• Separately stated on an invoice or receipt

This distinction means entertainment meals should now be treated differently from client-business meals. As such, organizations may want to consider establishing new documentation procedures that categorize meals into these separate categories.

Some additional business expenses were and remain nondeductible and should be categorized as such:

• Lunch with a customer, client, or employee without a business purpose or related discussion
• Club dues, such as golf or country clubs and athletic clubs
• Lavish or extravagant entertainment expenses

50% deductible

Meals with clients, customers, and vendors

A 50% deduction is allowed for meals with people related to a business — such as clients, customers, and vendors — as long as the following criteria are met:

• There’s a business purpose or resulting benefit to the business.
• The taxpayer is present.
• The amount isn’t lavish or extravagant.