Under the new tax bill passed in December 2017, and effective January 1, 2018, rules for deducting meals & entertainment (M&E) expenses for businesses changed. In prior years, most business M&E expenses were treated as 50% deductible, with certain categories being 100% deductible. The new law is much more restrictive.
No longer is client entertainment deductible, even at the 50% rate. Where employee meals offered for the employer’s convenience were 100% deductible in the past, they are now only 50% deductible. A business can, however, still deduct 100% of the cost of an employer-provided social/recreational expense, such as a holiday party. So, all is not lost!
Understanding the new rules and keeping good records are key, so that you can accurately categorize your M&E expenses and get the full deduction to which your business is entitled.
What is deductible?
Meals provided to staff for the convenience of employer – 50% deductible (till 2025).
Business & travel meals (NO entertainment) – 50% deductible.
Recreational, social, and similar activities provided for staff only – 100% deductible.
Meals reimbursed by a client – 100% deductible.
What is not deductible?
Meals with no business purpose.
Meals served WITH entertainment.
Some examples that may be helpful:
50 Percent M&E Deductions
- Lunch with a customer, client or employee in which a business discussion takes place. (Taxes & tip are included as part of the total cost.)
- Room rental for a dinner or cocktail party (assuming the event is for a business purpose).
- Eating out while on business travel away from home.
- Food & beverages provided to employees on the employer’s premises primarily for the employer’s convenience (this used to be 100% deductible!).
100 Percent Deductions
- Employer-provided social/recreational expenses such as a holiday party.
- Recreational/social activities provided to staff for teambuilding and training.
- Cost of business meals while on travel which will be fully reimbursed by a client.
- Cost of meals served to customers who are then billed for the meal, either together with a business event or separately.
- Business gifts up to $25 to any one individual per tax year.
In order to deduct expenses for business meals, there are a few things that must be documented. Receipts with the name of the person with whom you met with and a few words about the business discussion. If you do not keep the individual receipts, keeping a calendar with the following information is adequate:
- The amount of the expense.
- The time, date, and place of the expense.
- The purpose of the expense.
- The person with whom you met.
If in doubt as to whether an expense is deductible, or in which category it belongs, record it, and then flag it to discuss it with your tax preparer. And meanwhile, Bon Appétit!