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Understanding the Business Meals Deduction

This article we’ll cover the changes that have occurred to the business meals and entertainment deduction as well as, how to get the most of your deductions.

How Meal and Entertainment Deductions Work

Traditionally, meals and entertainment fall into one of three categories:

  • 0%
  • 50% (most common)
  • 100%

Prior to 2018, meals and entertainment deductions were commonly taken at 50% of the expense. This means if a company had 10K in meals and entertainment expenses, it would often deduct a flat 5K. Now that we’re full steam ahead into 2018, this method is no longer advisable.

Meals and Entertainment Deduction: Tax Reform

People at a baseball game

As of 2018, many entertainment expenses are no longer deductible. Easy, now you just write off 50% of the food expense and not entertainment, right? Not so fast, things can get a bit more complicated.

Here are a few examples:

Example A (Prior to 2018)

Businessman Bob takes Prospect Pam to a baseball game to discuss business. Bob buys Pam a hotdog and a drink as well as the tickets. Afterwards he deducts 50% of  the cost of both the tickets and food.

Example B (2018)

Businessman Bob takes Prospect Pam to a baseball game to discuss business. Bob buys Pam a hot dog and a drink as well as the tickets. Knowing he can no longer deduct entertainment costs, Bob begins to write off the hot dogs and drinks.

Businessman Bob is all good here…..right?

According to the 2018 changes, this may no longer qualify as a deductible business meal. Had he taken Prospect Pam to a restaurant beforehand to eat and discuss business and THEN gone to the game afterwards, he likely would have been able to claim the deduction. But because he and Pam ate their meals in front of entertainment, it’s likely he can no longer take the meal deduction because it’s commingled with the entertainment.

The Takeaway

If the above example has illustrated anything, it’s that it would be a good idea to read as much as you can about the H.R. 1 (previously known as the Tax Cuts and Jobs Act). That, or hire a professional accounting team.

Other Notable Changes:

  • The IRS is no longer allowing 100% deduction under the de minimis meal exception.
  • Previously 100% deductible, currently 50% deductible, with many employer-provided meals non-deductible beginning 2026.
  • Exception “For the convenience of the employer” no longer allowed. This means for example offices that have built-in kitchens and cafeterias where employees can grab free grub are no longer deductible the same way they were previous to 2018.  One of their few ways this may still be deductible is if the employer applies the food charges to the employee’s Form W2 as wages.

How to get the Most of out Your Business Meals Deductions in 2018

Business owners may be able to take 20% in deductions by looking at individual transactions and receipts or by taking a Stat Sample (a small sampling of receipts which you then extrapolate to the overall amount.)

What does this all mean? It means you need to stay on top of all your transactions by carefully organizing your receipts and transactions or by using a reliable online bookkeeping service like Bookly, that automates this process for you.

Not only will this help you single out transactions that are 100% deductible, it will also help manage exposure with the IRS. This has never been more true with the new changes to the Business Meals and Entertainment Deductions, which states that entertainment is no longer deductible.

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

KPMG SparkJuly 29, 2018Posted In: Accounting Info

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