IRS updates rules impacting employee meals and entertainment

With the holiday season upon us, many employers plan to host holiday or year-end parties for their employees. The Tax Cuts and Jobs Act has added a few more wrinkles to how these business meals and entertainment expenses are to be handled from a tax perspective. Some of the rules were unclear, so the IRS has recently released additional guidance.

According to the new  IRS guidance, taxpayers may deduct 50 percent of an allowable business meal expense if:

  • The expense is an ordinary and necessary business expense, including business-related meals while traveling;
  • The meals are not lavish or extravagant;
  • The taxpayer or an employee is present when the food or beverages are furnished;
  • The food and beverages are provided to a current or potential business customer or client or similar business contact;
  • Food and beverages purchased during an entertainment activity are deductible if they are purchased separately from the cost of the entertainment.

What is deductible at 100 percent?

  • Expenses incurred for recreational, social or similar activities for the benefit of all of the company’s employees. Again, this would be a company-sponsored party (e.g. office holiday party or company picnics) or outing to a sporting event where all the employees were invited to attend.  The event cannot discriminate in favor of highly compensated employees. In other words, the activity or event must be open to all employees, not just managers or higher ranked employees.

What is not deductible?

  • Any business-related entertainment activities and expenses. Tickets to sporting events, concert tickets, an evening at a night club, golf club dues, company golf outings for customers, and theater tickets are some of examples.

It is necessary to keep scrupulous records of these expenses in order to take these deductions.  In other words, be sure to keep receipts, canceled checks or bills that show the amounts and dates of the expenses. Also be sure to record the business purpose for the expenses.

Please contact us if you should have any questions.