October 23, 2020
Many of the changes implemented through the Tax Cuts and Jobs Act of 2017 (tax reform) provided immediate relief for Atlanta businesses. This included a reduction of the corporate tax rate to 21%, a new pass-through deduction, a 100% bonus depreciation, increased automobile depreciation limits, and increased Section 179d expensing. The combination of these changes opened the door to significant tax-saving opportunities. However, the changes to the meal and entertainment deduction caught many off-guard. Tax reform eliminated the opportunity for businesses to deduct entertainment-related activities and changed the deduction for certain meal expenses to 50%. Unlike other aspects of tax reform that have been modified during COVID-19, this deduction has not been changed. In fact, the IRS had only published proposed rules which were effective until the release of final regulations (TD-9925). To help clients, prospects, and others, Wilson Lewis has provided a summary of key details below.
Overview of Final Regulations
The final regulations confirm that entertainment expenses including those related to any social, athletic, or sporting club, continue to be ineligible. However, the term entertainment does not include any food or beverage served during the activity, unless the costs are not stated separately from the entertainment expense. In cases where the expenses are stated separately, a 50% deduction for food and beverage costs is permitted.
Most of the guidance on eligibility for business meal deductions remained in the final regulations. Specifically, the meal expenses must not be lavish or extravagant under the circumstances, and the taxpayer, or employee of the taxpayer, must be present when food or beverages are served. In addition, the requirement that the food and beverage be provided to a business contact, which includes customers, clients, consultants, or similar business contact remains.
New IRS Definition – Business Contact
The IRS clarified a business contact may also mean an employee, supplier, agent, partner, or professional advisor. In addition, it was determined that business owners are also included in the definition. This means qualifying meals provided to both employees and business owners are eligible for the 50% deduction (assuming all other rules are met).
Meal Deduction – Fringe Benefit
It was also confirmed the 50% deduction applies to all food or beverages (including meals, snacks, or other beverage items) provided to employees as a fringe benefit. This includes when employees of restaurants eat meals in the restaurant where they work. It is important to note the cost of a meal includes any delivery fees, tips, and sales tax, but not the cost of the transportation to the meal. Finally, if a meal is treated as compensation to an employee, then it can not be deducted under these rules.
Other Business Functions
The final regulations confirm that food and beverage expenses related to recreational, social, or related activity, designed to benefit the taxpayer or its employees (holiday parties) are typically 100% deductible. This assumes activities do not discriminate in favor of highly compensated employees, officers, shareholders, or others who own 10% or more interest in the business.
Contact Us
The recently issued final regulations provide important clarification for Atlanta businesses on what business-related food and beverage expenses can be deducted and at what percentage. IF you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.