Tax Cuts and Jobs Act
In late 2017, lawmakers in Washington were able to successfully pass what is known as the Tax Cuts and Jobs Act (TCJA). Embedded in this tax reform act were a number of changes. If you are a Business Owner or freelancer, it is likely that the implemented changes will bear some impact on your 2019 Federal Income Tax returns.
General Rule That Half Of Your Business Meals Are Deductible
Most taxpayers understand the general rule that half of your business meals are deductible under the Code and by and large, the rules and regulations surrounding the deduction are unchanged. The deduction still has to be ordinary and necessary in nature, not lavish or extravagant, and the taxpayer must be present at the time of the meal discussing business. If you meet the requirements for the deduction, ensure that you keep sufficient and thorough documentation. If you are ever audited, the IRS will want you to substantiate the deductibility of those business meals. Lack of substantiation may lead to a disallowance for the deduction.
Meals and Entertainment
If you have expenses that relate to entertainments with a meals component, it’s important you ask for an itemized invoice that separates out the food and beverage cost from the entertainment cost. Beginning in 2018, the Tax Cuts and Jobs Act has effectively eliminated the deduction for entertainment expenses. Without an itemized invoice with the costs for food and beverage separated, that entire expense would not be deductible.
The exception to this rule is if your company holds a company event for the benefit of its employees, then the deduction is not limited at all. The caveat is that the event must be open to all employees, not just high compensated employees, and the taxpayer must be able to substantiate a business purpose for the event, such as team-building and strengthening trust amongst employees. The IRS does not provide a bright-line test for what qualifies as a business purpose or not, so it becomes much more dependent on the facts and circumstances for each taxpayer.
Remember to Itemize Your Invoice
So the next time you decide to take a client out to dinner, remember to keep a copy of your receipts for records purposes. We recommend scanning a copy of the receipt so you don’t have to worry about losing it or the ink fading over time. And if the expense is entertainment in nature, remember to get an itemized invoice so you can take a deduction for at least the cost of food and beverages. Company-wide events held for the benefit of employees are still fully deductible.
The IRS has stepped up scrutiny of deductions for expenses related to meals and entertainment to ensure they are for legitimate business purposes. Spend a little extra time to document your meals upfront so you don’t have to worry about it down the road. If you have any questions about the deductibility of your meals, you can reach out to one of our CPA’s to get you the right answer. Cheers!