The 2017 Tax Cuts and Jobs Act (TCJA), which was effective as of the 2018 tax year, made changes to some tax deductions that are relevant to the self-employed. While some changes expire in 2025, others are permanent.
The TCJA impacts a small business in many ways. For instance, according to Section 199A, a 20 percent qualified business income deduction is available to any business that pays tax through a taxpayer, rather than through the corporation, an approach that's termed a pass-through business. Another change relates to how meals are expensed.
Read More: Business Meal Tax Deductions: What You Need to Know
Meals with Customers
Under the TCJA, meals are a tax-deductible expense if you're meeting with a client, attending a business conference or traveling for business. To qualify as a deductible expense, the meal cannot be an extravagant one. What's more, the expense must directly relate to a discussion about the business or trade.
The percentage of the meal's cost that's deductible depends in part on your record-keeping. For instance, you can deduct 50 percent of the meal's cost if you retain the cash receipt. In contrast, if you record the meal's time and place, as well as the occasion of the meal, but fail to retain the cash receipt, you can deduct only 50 percent of the IRS standard meal allowance. In both cases, the meals may be provided to a current or potential business customer, client or another business contact.
In particular, 50 percent of meals are deductible if:
- Either a business owner or employee is present.
- Neither drinks nor a meal would be termed extravagant or lavish.
- The meal is shared with a customer, business partner or employee.
- The purpose of the meal is to conduct business.
The IRS standard meal allowance is equal to the year's federal M&IE rate that's available through the U. S. General Service Administration's website. Needless to say, if a meal is not related to the conduct of business with a client, a business conference or business travel, it's not deductible.
Due to the Tax Cuts and Jobs Act, for the tax year 2018 and later, food and beverages that are itemized on a receipt, separate and apart from any entertainment event that was the origin of their purchase, are deductible. If, however, the meals and drinks are included in the price of attending an entertainment event, such as a night club or golf club, they aren't deductible.
Meals for Employees
If an employee meal is a benefit, it is income to the employee and should be reported on the person's W-2 and the annual tax return. Coffee and donuts or something similar that you provide at a meeting, or the provision of an occasional meal to an employee who works overtime, need not be reported. Likewise, cafeteria meals need not be reported if the facility's revenue is equal to or greater than its costs.
If you furnish meals at your business location for the convenience of your business, you don't have to include the value of meals to employees in their pay.
Requirements to Expense Meals
Successfully expensing meals is a four-pronged process:
- Verify the business expense is a legitimate one.
- Keep a document that confirms the validity of the deduction.
- Confirm if the expense is deductible in its entirety or just a portion thereof.
- Apply the 50 percent rule to the meal's cost using a receipt or the IRS meal allowance.
Buying a meal to benefit a customer is a good way to expand your business network and, perhaps, make a sale. Meals with a client are a legitimate tax deduction if both a client and an employee are present and discussions are related to the active conduct of business for the duration of the meal.
- Investopedia: Explaining the Trump Tax Reform Plan
- Internal Revenue Service: IRS issues final regulations on the deduction for meals and entertainment
- Internal Revenue Service: Tax Cuts and Jobs Act: A Comparison for Business
- Internal Revenue Service: Expenses for Business Meals Under § 274 of the Internal Revenue Code
- Internal Revenue Service: Employer's Tax Guide to Fringe Benefits For use in 2020
- General Services Administration: M&IE Breakdown
- If filing your income tax return using Form 1040-EZ you will need to use Form 2106-EZ to claim meals as a tax deduction.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.