Are Business Meals with Clients and Customers Deductible?

Unfortunately, the answer seems to be No starting January 1, 2018.  You likely have heard conflicting information on the deductibility of business meals with clients and prospects.  The 2017 Tax Cuts and Jobs Act repealed all the business meals deductibility provisions which were created under the Tax Reform Act of 1986.  The Tax Reform Act of 1986 requirements are listed below.

  1. Required you to establish that the meal was directly related to or associated with the active conduct of your business
  2. Required you to substantiate that you had a substantial and bona fide business discussion during, directly preceding, or directly following the meal

The repeal means the rules that allowed client business meals when directly related to or associated with the active conduct of your business are now gone.

Here are some examples of the way we see business meals after tax reform:

  • Sam owns a tax practice and takes Silvia, a prospect, to lunch and pays for the two of them. Now, because of tax reform, this lunch is not deductible.
  • Sara and Jim are both dentists in private practice. They go to dinner to discuss a new piece of equipment that could benefit their practices. They each pay for their own meal. They get no deductions. Because of tax reform, Dutch-treat business meals are no longer deductible.
  • Fred takes a client of many years out to dinner to help him with his business plans for this year. They review the plans in detail. The client picks up the tab. Fred’s client may not deduct the business meal.
  • Sam owns a tax practice and provides meals to his employees for his convenience, the meal is 50% deductible.  Old rules 100% deductible.  (We will cover meals to employees in a future blog)

To see the changes in a technical way, let’s review what tax reform did to make the business meal not deducible:

  1. Removed directly related and associated entertainment from IRC Section 274(a)
  2. Removed entertainment from the substantiation expense requirements of IRC Section 274(d)
  3. Removed Section 274(n)(1) from the tax code. This section applied the 50 percent rule to entertainment

If you have any questions or would like some planning techniques please don’t hesitate to give us a call.