Updated: Jan 19, 2020
Suppose you take your best client out to dinner to celebrate your business relationship. If you own a business, are self-employed or run a side business, can you deduct any of the cost?
The answer is not so clear after the passage of the Tax Cuts and Jobs Act. Here are some tips to stay on the right side of the new rules:
Make clear it’s a business meal
Before the tax reform law was passed, small businesses could deduct 50 percent of the costs of both business meals and entertainment with clients. Now, the meal deduction remains but entertainment costs are no longer deductible.
The problem is that separating a business meal from client entertainment is not clear-cut. If you treat your best clients every year to dinner and tickets to a baseball game, now the tickets are not deductible, but the meal may be.
If you use the meal to discuss business, you should be safe to take the deduction. But if it’s just a social event and business is not discussed, the deduction is now harder to justify. That means it’s up to you to make clear it’s a business meal.
The easiest way to do this is to keep a business log for your meal expenses that includes a field labeled business purpose. In addition to recording the time, date, place and cost of the meal, list each attendee, their company affiliation and professional title. Then add a short description of a specific business purpose, such as: “Discussed new products and competitive price structure.”
For the strongest defense of your deduction, try to define the purpose of the meeting as something that could have an impact on your bottom line. Simply chatting about trends in your industry may not pass muster if you are audited under the new rules.
Avoid luxury meals
Deductions for extravagant expenses on meals and entertainment have always been disallowed and that hasn’t changed. So if you are having a serious business discussion over dinner, make sure it’s not at a luxury restaurant that will give you a huge dinner bill.
Clarity is coming
Due to complaints about the new tax code not drawing a clear line between meals and entertainment, the IRS is expected to provide more guidance in this area. But it could be several months or longer before that comes. In the meantime, create proper documentation to stay on the right side of the new rules.