Under the new tax law enacted in late 2017, the deductibility for meals and entertainment was limited.
Entertainment
Even for business purposes, entertainment is now 0% deductible. You can still take your clients to a game or out for a round of golf, you just won't qualify for a tax benefit. Entertainment expenses as part of a company party for your staff are still deductible.
Meals
Meals with clients will still be 50% deductible if they qualify for the following test:
- Ordinary and Necessary – this is a standard and broad term for business expenses in general. If it's reasonable to take clients or other business associates to lunch, then you should be able to pass this test.
- Directly Related – the meal must be directly related to business and should involve an active business discussion directed at gaining immediate revenue. A concrete business benefit is expected and must be the principal purpose for the meal.
- Substantiation – You must be able to provide the amount, time, place, business purpose, and relationship of the individuals present to qualify for the deduction.
- Limitations – your deduction will be limited if the meal provided is considered either lavish or extravagant. This test does not impose any fixed limits and is generally under the reasonableness test.
Meals for your staff so they can continue working over a break or for holiday parties are still generally considered fully deductible.
Please contact your tax advisor for questions on your specific circumstances.
