Keeping up with meal and entertainment expense deductions can be confusing. The Tax Cuts and Jobs Act (TCJA) of 2017, enacted in 2018, introduced significant alterations to the deduction rules for meals and entertainment expenses, but not all of those alterations were permanent. It’s important for businesses seeking to maximize tax savings while ensuring compliance with IRS regulations to know what has changed in the last six years and what remains the same.
Changes to the Menu
Before 2018, businesses could typically deduct 50% of business expenses involving meals and entertainment. However, the TCJA initially eliminated deductions for most entertainment expenses, while reducing the deductible portion for meals to 50%. Temporary changes in 2021 and 2022 allowed a 100% deduction for specific business meals, providing a temporary boost to tax savings. But now that it’s 2024, how does the menu of deductions look?
100% Deductible in 2024
Under current rules, certain meal expenses qualify for full deduction:
- Food offered for free to the general public
- Company holiday parties, picnics, and similar events where meals are provided
- Meals included as taxable compensation to employees or independent contractors
50% Deductible in 2024
Certain business expenses still fall under the 50% deductible category:
- Business meals that are ordinary and necessary with a clean business connection
- Meals provided during entertainment events that are purchased together. For instance, if meals are part of a package deal with event tickets, only 50% of the total cost is deductible.
- Meals provided to employees on the business premises, including water, coffee & snacks
Non-Deductible in 2024
Certain expenses remain non-deductible under current tax laws:
- Membership dues for clubs primarily organized for entertainment purposes, like country clubs or social clubs.
- Cover charges for venues like nightclubs, as well as entertainment event tickets (e.g., concerts, theater shows).
- Expenses related to lavish or extravagant meals, considering the circumstances.
Best Practices for Documenting Expenses
Proper documentation is key to substantiating meal and entertainment deductions:
- Keep detailed receipts for all expenses, noting the date, place, amount, and business purpose. This applies to both 100% and 50% deductible expenses.
- Record the names and business relationships of all attendees for meals, especially for client business meals or team gatherings.
- For company events, maintain a guest list and clearly state the business purpose.
- When meals are part of entertainment packages, separate meal costs from entertainment costs on receipts.
- Implement a written accountable plan outlining allowable business expenses for employees.
- Use separate credit cards for business and personal expenses to streamline expense tracking and differentiation during tax reporting.
Strategic tax planning and compliance measures help maximize tax savings while minimizing audit risks, contributing to overall financial health and stability. Consulting with a tax professional can provide further guidance tailored to specific business needs and ensure adherence to evolving tax regulations.
Meagan Pritchard re-joined ARB in 2020 and is a senior tax manager. At ARB, Meagan provides domestic, international, state and local tax services and compliance as well as advisory consulting services, primarily for corporations, nonprofits and auto dealerships. Prior to joining ARB, Meagan worked in public accounting for 7 years, two of those previously at ARB, and also worked at a non-profit as a Controller.
