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IRS gives clarity on meals deduction changes

Jim HamillALBUQUERQUE, N.M. — One of the more common deductions, if not the most common, is for business meals.

It is very convenient to meet clients, customers, and business associates for breakfast, lunch or dinner. It is very common for one person to pick up the tab for this meal.

At one time, business meals were deductible and also fairly broadly defined.

The first change to this was to reduce the allowed deduction to a percentage of the cost incurred. Instead of deducting 100% of the cost, only 80% could be deducted. This was then changed to 50% of the cost.

The second change was to limit the deduction to meals that were “directly related” to business. Before that change you could also deduct meals “associated with” business. The broader definition would allow “goodwill” type meals with people who had no current business relationship with the host.

After those changes, meal deductions required a business discussion with another party with whom you had a current business relationship. The discussion could be at the meal, or immediately before or after the meal.

In addition to business meals, the same 50% deduction was allowed for business-related entertainment, such as theatre or athletic events.

The third change, which was part of the 2017 legislation, eliminated any deduction for entertainment.

The 2017 legislation was thrown together at the last moment. It had typographical errors, cross-reference errors, and logical rabbit holes. In eliminating the deduction for business entertainment, it left unclear whether business meals had also been eliminated.

Tax experts could not point to anything in the legislation that would allow deductions for bona fide business meals after 2017. They instead pointed to comments in the committee reports in the House that suggested there was no intent to change the business meal deduction.

The lack of clarity on such a basic issue could be resolved if business meals were not considered to be “entertainment.” Entertainment is not deductible after 2017. No question. So to be deductible meals cannot be entertainment.

I actually hope that at this point you think this column is devolving into silliness. Why would we have a tax law that could not make clear whether the always-deductible meals had, by a stroke of the pen, become nondeductible entertainment?

On occasion I quote the former Treasury Secretary William E. Simon, who said the United States deserved a tax law that looks like it was designed on purpose. Instead we live with the words of Mick Jagger: You can’t always get what you want.

Because Congress cannot write clearly, the IRS, who many see as the enemy, had to step in and clarify that business meals were, in fact, still deductible. So perhaps we need to better define the IRS as our frenemy.

Meals are not entertainment. Entertainment is items like tickets to sporting events, tickets to the theatre, golf greens fees, hunting or fishing trips, and so on. But meal costs may be linked to entertainment charges in a way that does not allow each cost to be separated.

Our frenemy says that we can deduct business meals under certain circumstances. First, the cost must be separately stated so there is no confusion that it might instead be entertainment. Second, it must be helpful to the business. Third, the cost cannot be extravagant.

The taxpayer or an employee of the taxpayer must also be present at the meal. Finally, the meal must be with a party who has a direct connection to the business.

Let’s sum this up then. You can deduct 50% of bona fide business meals. Why? Because some language buried in Congressional committee reports suggest so and our frenemy says it won’t challenge us. The law doesn’t exactly say this.

And, you say, do I care? Many of you might. If you travel for business, and your employer covers your expenses, including meals, you care. Wait, you say, my employer cares, but why do I care? Because if the meals are not deductible your employer’s payment is income to you.

The only exception is an occasional meal that meets a “de minimis” test. But if meals are tax deductible, your employer’s payment of your business meal cost is not income to you.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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