As we’re coming up on the 4th of July weekend, sliding on our meat sweat socks and firing up the barbecue, here’s some good news for business meals: the Tax Cuts and Jobs Act (TCJA) removed the “directly related and associated with” requirements from business meals.
The net effect of this change is to subject business meals once again to the pre-1963 “ordinary and necessary” business expense rules.
And, I think you are really going to like these rules
You might even want to invite your favorite client over for the 4th.
So, let’s dive right in to discuss examples of how Business Meals can be deductible.
Question 1. If, for business reasons, you invite your client over for a backyard BBQ, but you do not discuss business, can you count the BBQ as a business meal and deduct the costs.
Answer 1. Yes. Even though you did not discuss business, the law provides that if the circumstances are of a type generally considered conducive to a business discussion, you may deduct the expenses for meals and beverages to the extent they are ordinary and necessary expenses.
Consider this “no discussion” meal a “quiet business meal.”
Question 2. What are circumstances conducive to a business discussion?
Answer 2. This depends on the facts, taking into account the surroundings in which the meals or beverages are furnished, your business, and your relationship to the person entertained. The surroundings should be such that there are no substantial distractions to the discussion.
Generally, a small BBQ in the backyard, or at the park, or even on the beach could be considered conducive to a business discussion. On the other hand, business meals at a festival, nightclubs, sporting events, large cocktail parties, and sizable social gatherings would not generally be conducive to a business discussion.
Meals Served in Your Home
Question 3. Wait! But doesn’t a business meal served in your home automatically disqualify the deduction?
Answer 3. No, as long as you serve the food and beverages under circumstances conducive to a business discussion. But here’s the caveat: Because you are in your home, the IRS adds that you must clearly show that the expenditure was commercially rather than socially motivated.
Question 4. If, strictly for goodwill purposes, you invite a customer and his or her family to the BBQ and don’t discuss business, will the cost of the BBQ become non-deductible?
Answer 4. Not if, in light of all facts and circumstances, the surroundings are considered conducive to a business discussion, and the expenses are ordinary and necessary expenses of carrying on the business rather than socially motivated expenses.
Question 5. Is the situation the same if the taxpayer’s spouse accompanies the taxpayer at a dinner or for business goodwill reasons?
Answer 5. Yes, the meal is deductible. This is true whether or not the customer’s spouse is present. Again, the meal must meet the ordinary and necessary business expense standards.
Properly Document the Meal Deductions
You need to keep records that prove your business meals are ordinary and necessary business expenses. You can accomplish this by keeping the following facts:
- Receipts that show the purchases (food and drinks consumed)
- Proof of payment (credit card receipt/statement or canceled check)
- Note of the name of the person or persons with whom you had the meals
- Record of the business reason for the meal (a short note—say, seven words or fewer)
And don’t forget that the costs of your business meals continue to be 50 percent deductible (as they originally were before the TCJA).
Let me know if this Meal Deduction Tax Tip has been helpful. If you have any questions or comments feel free to reach out to me here on LinkedIn and make sure to check us out at The Tax Planning Pros.