Despite the removal of the deductibility of entertainment expenses, The Tax Cuts and Jobs Act created more opportunities to deduct business meals.
The new tax laws removed language that the meals had to be “directly related to” or “associated with” the active conduct of business.
The effect of the wording caused the tax law to revert to the pre-1963 “ordinary and necessary” business expense rules. The change to the ordinary and necessary rules focus on the circumstances being conducive to a business discussion.
Here are a few examples:
Question 1. If, for business reasons, you take a customer or client to breakfast, lunch, or dinner at a restaurant or hotel, but you do not discuss business, can you deduct the costs of the food and beverage?
Answer 1. Yes. Even though you did not discuss business, the law provides that if the circumstances are of a type generally considered conducive to a business discussion, you may deduct the expenses for food and beverages to the extent they are ordinary and necessary expenses. Consider this a “quiet business meal.”
Question 2. What are circumstances conducive to a business discussion?
Answer 2. This depends on the surroundings where the meals or beverages are served, your business, and your relationship to the person entertained. The surroundings should be such that there are no substantial distractions to the discussion.
Generally, a restaurant, a hotel dining room, or a similar place that does not involve distracting influences is considered conducive to a business discussion. Business meals at nightclubs, sporting events, large parties, shows and large social gatherings would not generally be conducive to a business discussion.
Meals Served in Your Home
Question 3. Does a business meal served in your home disqualify the deduction?
Answer 3. No, as long as you serve the food and beverages under circumstances that are conducive to a business discussion. When deducting a meal in your home, you must clearly demonstrated that the expenditure was business rather than socially motivated.
Question 4. If, for goodwill purposes, you take a customer and his or her spouse to lunch and don’t discuss business, will the cost of the lunch become non-deductible?
Answer 4. Not if the surroundings are considered conducive to a business discussion, and the expenses are ordinary and necessary expenses rather than socially motivated expenses.
Document the Meal Deductions
You need to keep records that prove your business meals are ordinary and necessary business expenses. You can accomplish this by keeping the following:
- Receipts that show the purchases (food and drinks consumed)
- Proof of payment (credit card receipt/statement or canceled check)
- Note of the name of the person or persons with whom you had the meals
- Record of the business reason for the meal (a short note)
In addition to being ordinary and necessary, you should consider the following criteria for the business meal to be dedutible:
- The taxpayer (or employee) is present at the furnishing of the food or beverages
- The cost of the food is not lavish or extravagant
- The meal and beverages are provided to a current or potential customer, client, consultant, or similar business contact
- When food and beverage are provided during an entertainment activity, the cost of the food and beverages are purchased or separated from the entertainment expense.