New Rules on Deducting Business Meals and Entertainment Expenses Under the Tax Cuts and Jobs Act

by Diana Fitzpatrick, J.D., NYU School of Law
Learn about important changes to the business meal and entertainment expense deductions under the new tax law.

For many years, business owners could deduct 50% of the cost of their business-related meals and entertainment. This was an important deduction that covered both business-related meals (with or without entertainment) and the cost of tickets or anything else related to entertaining customers or clients.

Entertainment Deduction Eliminated Under New Tax Law

Under the new tax law, all business deductions for "entertainment, amusement, or recreation” are eliminated. This means that if you bring a client to a Warriors basketball game, you can’t deduct the cost of the tickets to the game. Starting in 2018, any entertainment expenses -- like tickets for sporting events -- are no longer deductible business expenses. Entertainment is broadly construed to include any activity typically considered entertainment like sporting events or games, ski or golf outings, theater or night clubs, and fishing or other overnight vacation trips. You can no longer deduct the costs incurred in connection with these activities as a business expense.

Stricter Rules for 50% Meal Deduction

The TCJA doesn’t mention meal expenses and, at first, there was uncertainty as to whether meals were included in the term “entertainment.” If meals were included, then the long standing practice of taking clients and customers out for a deductible business-related meal would no longer be allowed.

To avoid confusion, the IRS issued a notice clarifying its position that, subject to certain rules, business-related meals are still 50% deductible under the new tax law. This was a big relief for many small business owners who rely on the deduction to cultivate business relationships and for restaurant owners who benefit from it as well.

Under the new tax rules, you can deduct 50% of your meal and beverage costs as a business expense if:

  • the cost is “ordinary and necessary” or incurred in the course of your business
  • the meal is not lavish or extravagant under the circumstances
  • you or one of your employees is present
  • the meal is with current or potential customers or business contacts, and
  • with meals or beverages purchased at an entertainment activity, the food and beverages are bought separately from the entertainment or the cost is listed separately in the bill.

Under these rules, if you take a customer to a Warriors game or professional sporting event, you no longer can deduct the cost of the tickets. As long as the food or beverages you consume are paid for separately from the tickets, however, you can still deduct 50% of the cost of anything you eat or drink at the game.

This assumes you satisfy the other general business meal deduction requirements, such as “ordinary and necessary” and not “lavish or extravagant.” There are no hard and fast rules on these requirements. Use a common sense approach and, in all cases, make sure you have good documentation for any business expense you want to deduct. If you have questions, it’s always a good idea to hire a small business or tax lawyer to make sure you do things properly before you file your tax return with the IRS.

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