One concern in the wake of the federal tax-reform bill signed into law late in 2017 has been the deductibility of business-related expenses under Section 274(k) of the Internal Revenue Code. There have been some changes to the rules, while other areas remain murky. Here's what I know.
For tax years beginning in 2018, Congress has disallowed the previously established 50 percent deduction for entertainment and recreational expenses other than certain Section 274(e) exceptions that deal with so-called nondiscriminatory employee gatherings.
When it comes to the 50 percent deduction allowed on meals, Congress has eliminated "de minimis" (trivial or minor) expenses, like coffee and doughnuts for employees. Also disallowed are meals provided on the premises solely for the convenience of the employer.
So what exactly remains deductible?
The rules of f&B deduction
Generally, you can continue to deduct 50 percent of food-and-beverage expenses associated with the carrying on of a trade or business. That includes business meetings, conventions and trade shows, as long as the meals in question are consumed in a business setting. Established by the Internal Revenue Service, here are five guidelines to follow in determining if you can take the deduction:
1. The expense is ordinary and necessary for the purposes of carrying out the taxpayer's trade or business.
2. The expense is not considered to be either "lavish or extravagant" under the circumstances or surroundings of the event in question.
3. The employer or taxpayer was present at the furnishing of the F&B; e.g., you cannot deduct a meal that you paid for if you were not physically present at the meal.
4. The F&B is provided directly to a current or potential business customer, client, consultant or contact.
5. In the case of meals that are provided during an entertainment event, the F&B must be purchased separately from the entertainment, with its cost stated separately. A deductible example of this would be the cost of hot dogs and beverages at a baseball game that is paid for separately from the admission ticket.
This final point gets problematic when the event is a package deal, and entertainment and meal costs are lumped together in the price. For example, a dinner show whose price includes both the show and the food would not be deductible.
Thus, whenever possible, when charging for entertainment at an event at which food might be available, it's probably wise to separate out the cost of entertainment versus the cost of the meal.
In all cases, as everyone tries to adjust to the new tax measures, the advice of a competent tax consultant should be sought.