Understanding Business-Meal Deductions

On October 3, 2018, the IRS provided mold shops interim guidance concerning the deductibility of business meal expenses. In Notice 2018-76, the IRS clarified that shops will still be able to deduct 50 percent of their business-meal expenditures, just not expenditures associated with entertainment.

Background

The Tax Cuts and Jobs Act (the Act), which became law in December of 2017, eliminated the ability of mold shops to deduct expenditures for entertainment, amusement or recreation. While the Act repeals the deduction for entertainment expenditures that are paid or incurred after December 31, 2017, it does not specifically address the deductibility of expenses for business meals.

Before the Act, mold shops generally could deduct 50 percent of the meals and entertainment expenditures that they incurred by carrying on their trade. As a result, many shops accounted for meals and entertainment in one account because the same tax treatment applied. However, mold builders now need to account for meals and entertainment separately, as no deduction is allowed for entertainment in 2018 and beyond.

Mold shops must meet all five of these requirements to deduct 50 percent of the business meals, and the notice specifically states that the disallowance for entertainment expenditures may not be circumvented by artificially inflating the amount charged for food and beverages.

 

Guidance

The IRS intends to propose treasury regulations providing guidance on the deductibility of expenses for business meals. As a result, this guidance is interim but gives molds shops something to consult until the IRS issues additional guidance.

Before the Act, expenditures for entertainment, amusement or recreation were not deductible unless the shop could establish that the entertainment was directly related to the active conduct of business during, immediately preceding or immediately following the entertainment. The Act repealed this exception and disallowed a deduction for all entertainment expenditures. Otherwise allowable meals remain deductible and are subject to the 50-percent limitation.

Shops may deduct 50 percent of such an allowable business-meal expense if the expenditure meets all of the following conditions:

1. The expense is ordinary in nature and is paid or incurred during the taxable year in which the mold shop is conducting business.
2. The expense is not lavish or extravagant.
3. The shop or an employee of the shop is present during the meal.
4. The food and beverages are provided to a current or prospective customer, consultant or similar business contact.
5. The food and beverages are purchased separately from the entertainment, or the cost of the food or beverage is stated separately from the cost of the entertainment (in the case of a meal provided during or at an entertainment activity).

Mold shops must meet all five of these requirements to deduct 50 percent of the business meals, and the notice specifically states that the disallowance for entertainment expenditures may not be circumvented by artificially inflating the amount charged for food and beverages.

Mold shops should document these five requirements for each business meal to ensure that they may continue to deduct 50 percent of their business meals..

 

The notice provides three examples addressing the deductibility of business meals: 

1. The shop buys tickets to take a customer to a baseball game and also buys the customer a hot dog and drinks. The IRS explains that 50 percent of the cost of the hot dogs and drinks is deductible, while the cost of the baseball tickets is not. 
2. The shop brings a customer to a baseball game but purchases tickets for a suite, in which food and beverages are included. The cost of the food and beverages are not separately stated on the invoice. As a result, the shop is not entitled to any deduction for the event.
3. The shop brings a customer to a baseball game, but the cost of the food and beverages is stated separately on the invoice. By separately stating the cost of food and beverages, the shop is entitled to a deduction equal to 50 percent of the cost of food and beverages but still is not entitled to a deduction related to the ball game.

New Guidance

This new guidance provides some clarity for mold shops to determine which meal expenditures remain partially deductible and which do not. The tax code requires mold shops to substantiate their expenditures in the event of an examination, so they should segregate the cost of meals and entertainment going forward.

Most shops should consider establishing a separate general ledger account for entertainment expenditures. Also, mold shops should document these five requirements for each business meal to ensure that they may continue deducting 50 percent of their business meals.