When the Tax Cuts and Jobs Act (TCJA) passed in late 2017, it was promoted as the most significant change to U.S. tax code in over 30 years. There were many changes that business taxpayers welcomed such as the lowering of the corporate tax rate, implementation of the Qualified Business Income Deduction and the ability to deduct 100% of an asset in the year it was acquired. These changes met the President’s stated goal of making America more tax-friendly for businesses. However, it was not all good news because several long-standing tax benefits were altered or eliminated to offset the changes. One of the most well- known was the modification to rules for deducting business meals and entertainment expenses. Tax reform eliminated the opportunity for California construction companies and contractors to deduct entertainment expenses related to the business. It left many wondering if meal and drink expenses purchased during a business-related entertainment event would still be deductible. On October 5th, 2018, the IRS issued Notice 2018-76, which provides guidance on this issue and spells good news. To help clients, prospects, and others understand the changes and impacts on their company, JLK Rosenberger has provided a summary of key details below.
Key Details in Meal Deductions
Under interim regulations, the taxpayer may deduct 50% of an allowable business expense meal assuming the following conditions are met:
- The expense must be necessary and ordinary under Section 162(a) paid or incurred during the tax year when involved in the business.
- The meal expense is not considered lavish or extravagant under the circumstances.
- The taxpayer, or employee of the taxpayer, is present when the food or beverages are furnished.
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
- Food and beverages provided during an entertainment activity must be purchased separately from the activity, or the cost of the food and beverages must be separately itemized from the cost of the entertainment on one or more bills, invoices, or receipts.
Recordkeeping is Essential
It’s clear from the last bullet point that maintaining detailed records will be the key to substantiation. The IRS stated in the interim guidance, “The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.” It is clear that the IRS will pay careful attention to records and scrutinize all expenses seeking the required substantiation. This is an important change for construction companies to be aware of because prior regulations did not require such substantiation. It is essential to update company policies on meal expensing and documentation to align with the new guidance.
The interim guidance provides a sigh of relief for many business owners on the deductibility of meals. While entertainment expenses are now off-the-table, the IRS confirms that qualifying business meals can still qualify for a 50% deduction. If you have questions about the interim IRS guidance, how it applies to your company, or need assistance with a construction audit or tax issue, JLK Rosenberger can help! For additional information, please call us at 949-860-9893 or click here to contact us. We look forward to speaking with you soon.