October 16, 2018

Atlanta Companies Can Still Deduct Certain Meal Expenses

The Tax Cuts and Jobs Act (TCJA) implemented several significant changes to the tax code designed to streamline and simplify regulations. Many of the changes such as the Qualified Business Income Deduction, more generous asset expensing and depreciation rules, as well as, the lowering of the corporate tax rate were welcomed by many Atlanta companies. Such changes were essential to meeting the President’s goal of making the U.S. more tax-friendly for businesses. It was not all good news, however, as one of the most common business tax benefits – the meals and entertainment expense deduction – was drastically altered. It eliminated the opportunity for Atlanta businesses to deduct business-related entertainment expenses. Unfortunately, the law didn’t specifically address meal expenses incurred during entertainment events leaving many questioning their deductibility. On October 5^th, the IRS issued Notice 2018-76, which provides interim guidance on this issue. To help clients, prospects and others understand the changes and impact, Wilson Lewis has provided a summary of key details below.

Key Details on Meal Deductions

Under interim regulations, the taxpayer may deduct 50% of an allowable business expense meal assuming the following conditions are met:

• The expense must be necessary and ordinary under Section 162(a) paid or incurred during the tax year when involved in a business.
• The meal expense is not considered lavish or extravagant under the circumstances.
• The taxpayer, or employee of the taxpayer is present when the food or beverages are furnished.
• The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
• Food and beverages provided during an entertainment activity must be purchased separately from the activity, or the cost of the food and beverages must be separately itemized from the cost of entertainment on one more bills, invoices or receipts.

Examples

Some examples were provided with the guidance to demonstrate how the new rules should be applied. Two have been outlined below as an illustration.

• Example #1 – A company takes a client to a baseball game and purchases tickets for the client. During the game, the company purchases a hot dog and drink for the client to enjoy during the action. Under this example, the cost of the game ticket is considered an entertainment expense and is not allowed to be deducted. However, the cost of the hot dog and drink are considered a qualifying meal expense and are eligible for the 50% deduction.
• Example #2 – A company invites a business contact to a soccer game and purchases access to a suite where food and beverages will be available. The cost of the tickets for the game (which include food and beverage) is stated on the invoice only as tickets. In this scenario, the cost of the tickets is not deductible because they are considered an entertainment expense. In addition, since the food and beverage are not stated separately on the invoice they are also ineligible for the 50% deduction.

Substantiation

The IRS stated in the interim guidance, “The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.” It’s clear they will be carefully reviewing documentation and seeking substantiation for meal deductions to ensure they are in alignment with interim guidance. Given this fact, it’s important for companies to review and modify corporate policies to ensure they are in alignment with these changes. It’s also a good idea to communicate with and educate employees on their responsibility to collect the required documentation in the proper format.

Contact Us

The guidance makes it clear that certain meal expenses, even those incurred during qualifying entertainment events, can still receive a 50% deduction. This is welcome news for many Atlanta companies that were uncertain about how to treat these expenses. If you have questions about the new guidance or need assistance with an accounting or tax planning issue, Wilson Lewis can help! For additional information please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon!