It’s a beautiful day.  The birds are chirping, the sun is shining and you are meeting a client at a restaurant.

Not just any restaurant, mind you, but a nice one.

This one has high ratings, exceptional service and four “$”s next to it on Yelp.

Yes, its good to be in business so you can live like a king.  Getting the business to pay for your meal is genius.

But then you vaguely remember the talking heads on cable television discussing a tax law change.
Surely that wouldn’t have impacted a meal, would it?

​Tax Times are A Changing

The Tax Cuts and Jobs Act (TCJA) passed in 2017 changed many aspects of business and introduced such terminology as Qualified Business Income (QBI), eliminated that ambiguous domestic production deduction but also changed the rules on meals and entertainment.

Rules you may have used to deduct meals in the past.

Too Good to Be True

Business meals have long been a source of nebulous rules.  On top of that meals were usually included with the phrase “Entertainment”, a sort of catch all for the good times you can deduct just for the simple fact that it was charged to a business card!

The TCJA finally brought the hammer down on the aspect of the law many believed was just too good to be true.

Entertainment is no longer deductible.

Entertainment is a catchall phrase for the box seats provided by your employer, memberships at the club and any other activity organized for pleasure, recreation or social purposes.  It was a great gig for many years as the good times had in the name of business relationships were partially tax deductible, but the taxpayer is no longer going to subsidize business entertainment.
We should probably be grateful for the years this questionable policy was allowed.

Effective January 1, 2018, entertainment of all sorts is no longer deductible.

Action step: Split the category Meals & Entertainment into three categories: “Meals”, “100% Meals” and “Entertainment”

That was bound to happen eventually.  But at least you can still reduce your tax bill by eating out, right?

The one idea about deducting meals to keep in mind is there are three levels of deducting meals:

  1. Never (0%)
  2. Partial (50%)
  3. Always (100%)

Meals have long been categorized this way but most businesses don’t know of it (or record it correctly) and it may be costing them money.  What the TCJA did was to shift more meals from the Always to Partial and from Partial to Never.

Meals after the TCJA are now almost always partially deductible and at worst not at all.  In order to receive a 50% deduction for a meal there must be a meal with a client or customers, associates or prospects where business is discussed directly before, during or after the meal.

(No business discussion, no deduction.  The business purpose of the meeting and client should be documented in case the tax authorities ask.  Yes, the receipt should be filed (preferably electronically). While the odds are against an audit, if you are audited and you don’t have documentation, you’ll lose the deduction.

(Note: Talking to yourself doesn’t count. The morning latte at Starbucks isn’t deductible just because you charge it to a company credit card.)

Alternatively, meals when traveling away from home for your business or profession are 50% deductible.  You are considered traveling when your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work and you need to sleep. There is no change in this law from before the TCJA.

There are two major changes to the meals rule in 2018:

  1. Consuming a meal at an entertainment venue when the meal is not separately stated on the receipt is no longer deductible. That hot dog at the baseball game?  If it is included in the ticket price of the box seats then it is not deductible.  To receive the 50% deduction there must be a separate bill, invoice, or receipt allocated to meals.
  2. The “Always” category before the TCJA included meals provided to employees through an eating facility or providing meals for the employees to keep them at work.  While they are a nice perk and great incentive to keep employees on site (and productive) for lunch, these provisions from the employer to the employee are now only 50% deductible.

Despite the “Always” category slimming down, it still exists.  It remains 100% deductible for food at holiday parties and company-wide events or if it is included in compensation.  You want to be very specific on record keeping in this category.  While a big portion of this was moved to the partial category, the “Always” still exists.

As always, don’t let the tax tail wag the dog.  Certainly, don’t dine out just for a deduction but, when you purchase meals, do make sure you properly categorize them to reduce your tax bill as much as possible. Before you charge that medium rare filet to your company credit card, make sure it is business related to receive a partial deduction.