The IRS has issued final regulations relating to the limitation on tax deductions for meals and entertainment expenses. The ruling is consistent with the preliminary guidance and understanding of the regulations and applies to expenses paid or incurred after December 31st, 2017. The regulations confirm that entertainment expenses are not deductible, but leave the door open for partial or full deductibility of meal expenses, depending on the category of food and beverage expense involved.
- Meals provided in conjunction with business entertainment:
The final regulations confirm that entertainment expenses are not deductible. However, 50% of the cost of food and beverages consumed during an entertainment activity may be deducted provided the food and beverage costs can be segregated from the overall cost of the entertainment. For example, if you take two business associates to a baseball game and buy them peanuts and crackerjacks at a snack stand, there is no tax deduction for the tickets, but 50% of the cost of the snacks may be deducted.
- Employee Shift Meals:
Restaurants may deduct 100% of the food and beverage costs associated with employee shift meals. However, for such expenses to be fully deductible, the shift meals provided to employees must be consumed at the restaurant, and the food and beverage items must have been purchased for the purpose of preparing and providing meals to paying customers.
- Meals provided during recreational and social activities for the benefit of employees:
Food and beverage expenses incurred for a recreational, social or similar activity for the benefit of employees are generally 100% deductible. This category of meals includes holiday parties, picnics and summer outings, provided they do not discriminate in favor of highly compensated employees.
- Break room snacks:
Many employers provide free coffee, soda, bottled water, donuts and other snacks to all employees in a break room setting. The final regulations confirm that a break room is not a recreational, social or similar activity primarily for the benefit of employees, even if some socializing occurs at the time employees partake in the snacks. As such, employers may deduct only 50% of the expenses incurred to purchase break room drinks and snacks.
- Business meals, including meals consumed when traveling for business:
The final regulations confirm that 50% of business meals are tax-deductible. Included in this category are business lunches or dinners, meals provided at off-site business meetings, and meals consumed when traveling away from home for business. However, the following requirements must be met for the expenses to be deductible:
- The expenses cannot be lavish or extravagant under the circumstances;
- The taxpayer (or an employee of the taxpayer) must be present at the time the meals or beverages are consumed; and
- The food or beverages must be provided to the taxpayer and a business associate of the taxpayer.