Business Entertainment Expenses and Deductions

November 28, 2023
Business Entertainment Expenses and Deductions

The 2017 Tax Cuts and Jobs Act (TCJA) sharply limited the IRS meals and entertainment deduction – except for certain employee events, like office parties, and for recreational, social, or similar activities. To help with corporate tax planning, this article outlines the basic IRS business meal rules and exceptions for business meal deductions, business entertainment expenses that are no longer deductible, and “ordinary” and “necessary” expenses.

What meal expenses are deductible?

For business entertainment expenses paid or incurred in 2018 and later, taxpayers generally may deduct 50% of the ordinary and necessary food and beverage expenses associated with operating their trade or business (for example, meals consumed by employees during work travel), if all the following conditions are met:

  • The food or beverage expense is not lavish or extravagant.
  • The taxpayer (or an employee of the taxpayer) is present.
  • The food or beverages are provided to a current or prospective business associate.
  • The food or beverages are provided during or at an entertainment activity; they are purchased separately; or stated separately on an invoice, receipt, or bill, such that the amount charged reflects the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate their reasonable value.

What qualifies for the 100% meal deduction?

There are several exceptions to the 50% deduction limitation in IRC §274(n)(1). They include select expenses listed under IRC §274(e), for example, expenses treated as compensation, reimbursed expenses, and recreational expenses for the benefit of the taxpayer’s employees, as well as:

  • Meals in connection with reimbursed moving expenses included in the income of an employee under IRC §82
  • Food or beverages required by a federal law to be provided to crew members of a commercial vessel (other than luxury vessels)
  • Food or beverages provided to crew members of a commercial vessel operating on the Great Lakes, the Saint Lawrence Seaway, or any inland waterway of the U.S. that would be required by federal law to provide food and beverages to crew members if it were operated at sea (other than luxury vessels)
  • Food or beverages provided on an offshore oil or gas platform or drilling rig
  • Food or beverages provided on an oil or gas platform or drilling rig (or a support camp that is in proximity and integral to the platform or rig) located in the U.S. north of 54 degrees north latitude
  • Food or beverages provided by a restaurant if the expense is paid or incurred in 2021 or 2022

What entertainment is not deductible?

Unless one of the exceptions under §274(e) applies, no deduction is allowed for expenses for entertainment activities or facilities.

What is the IRS rule for entertainment expenses?

An expense must be “necessary” as well as “ordinary” to be deductible, even though clearly incurred in carrying on a trade or business. An expense is “ordinary” if it’s normal or common within the taxpayer’s business community, even if it’s an unusual expense for the taxpayer. In addition, an expense is “necessary” if it’s appropriate and helpful (rather than absolutely essential) to the trade or business. The courts tend to accept the taxpayer’s own judgment of the business necessity of an expense, so long as the item is neither personal nor a capital cost.

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