TCJA Meals and Entertainment Deduction Rules

The Tax Cuts and Jobs Act of 2017 (TCJA) altered the rules for deducting business-related meal and entertainment expenses. The changes redefined what qualifies as a deductible expense, impacting how companies budget for and document these common business activities.

The Elimination of Entertainment Expense Deductions

The TCJA eliminated the deduction for expenses related to activities considered entertainment, amusement, or recreation. This change marked a departure from previous tax law. Now, costs for events and activities such as tickets to sporting events, golf green fees, and theater tickets are disallowed for tax purposes. This disallowance extends to membership dues for any club organized for business, pleasure, recreation, or other social purposes.

A narrow exception exists for food and beverage costs associated with an entertainment event. These costs can be deductible if they are purchased separately from the entertainment or are stated separately on the invoice. For example, while the cost of a skybox at a sporting event is not deductible, the cost of food and beverages provided in that setting could be if itemized separately. Without a separate charge, the entire expense is treated as a non-deductible entertainment cost, so taxpayers must request detailed receipts.

Navigating the 50 Percent Limit for Business Meals

The standard deduction for qualifying business meals is limited to 50 percent of the cost. For a meal expense to meet this requirement, it must satisfy several conditions outlined by the IRS. The expense must be an ordinary and necessary part of carrying on a trade or business, and the cost cannot be lavish or extravagant under the circumstances.

To claim the deduction, the taxpayer or an employee of the taxpayer must be present when the food or beverages are furnished. The meal must be provided to a current or potential business customer, client, consultant, or a similar business contact. These rules apply to various situations, including meals with clients and business travel meals.

A temporary 100 percent deduction for business meals provided by a restaurant was permitted for 2021 and 2022. With the expiration of this provision, the 50 percent limitation is the default rule. This 50% limit also applies to meals provided on-site for the convenience of the employer, though this deduction is scheduled to be eliminated after 2025.

Exceptions and 100 Percent Deductible Meals

While most business meals are subject to the 50 percent limitation, certain specific categories qualify for a 100 percent deduction. These exceptions are narrowly defined and apply to particular circumstances. Examples include:

• Company-wide recreational or social events, such as a holiday party or summer picnic, provided they are primarily for the benefit of non-highly compensated employees and their families.
• Food and beverages that are made available to the general public, such as complimentary coffee and snacks in the waiting room of a business.
• Occasional, small-value food items provided to employees, such as coffee and donuts in a breakroom, which can be deductible as a de minimis fringe benefit.
• The cost of meals a business prepares and sells to a client or customer, which is deductible as a cost of goods sold.

Substantiation Requirements for Meal Expenses

The IRS requires that businesses maintain detailed records to prove that a meal expense was for legitimate business purposes. The elements of proof that must be documented for each meal expense include:

• The amount of the expense.
• The date and place the meal occurred.
• The business purpose of the meal or discussion.
• The business relationship of the individuals who participated, such as a client, customer, or supplier.

Practical methods for meeting these requirements involve keeping all receipts and supplementing them with a log or calendar. For each expense, the taxpayer should record the necessary details promptly while the information is still fresh. Digital apps and software can streamline this process by allowing users to capture images of receipts and annotate them with the required information.