Well, things have changed in 2018 when it comes to writing off meals and food expenses in your small business…and frankly, that’s for any size business. Large or small, business owners have to reevaluate their budget for the food they were able to deduct in the past.
Dining, meals, food in the office, food while traveling, eating with employees, eating with partners or clients, whatever you call it, there’s one thing in common: Confusing. Yes…most of it is still a write-off, we hope, but what percentage and how to stay out of hot water with the IRS- that’s a whole other question.
First, let’s examine the ‘types’ of meals and I’ll try and ‘set the table’ with 4 main options to consider and what you should be tracking in your books.
Type 1: Dining with a Prospect or Important Client
Obviously, this is the most common meals expense we have all been relying on and utilizing in our businesses for years. Typically deductible at 50%, and we hope that continues to be the case. (IRC Section 274(a) 2018; 274(d) 2018).
Regrettably, there is a growing debate and sharp divide among CPAs and tax professionals that the meals out with a client or prospect, or even business partner are NOT deductible. The argument is that when the entertainment expense was completely repealed under the Tax Cuts and Jobs Act (TCJA), by default it grabbed the meals expense under its umbrella.
However, it appears that a majority of tax professionals expect IRS Regs or further Congressional guidance to ‘clarify’ the issue. Specifically, we are expecting that meals, unrelated to any entertainment experience, will STILL be deductible. Thus, we are directing our clients to ‘track’ these expenses in 2018, but not ‘deduct’ them until further guidance from Congress or the IRS.
* Technically, the TCJA made meals with clients and prospects non-deductible. We expect the IRS to provide Regs that meals ‘not tied to an entertainment experience’ and truly non-entertainment meals to still be deductible. We don’t know when this change/guidance will come but track your meals separate from entertainment in the meantime as if they are still deductible.
** Employees are defined as non-owners,/officers/directors, or non-highly compensated employees. For example, the majority of those attending a year-end party, team building activity, or eating the in-office food, must be employees as defined in the preceding sentence.
Type 2: Dining While Traveling
Good news here- no changes. Meals while traveling outside of a normal commute in your business were deductible by 50% and that continues to be the case. More specifically, these are expenses while traveling for legitimate business meetings. Examples would include education or training conferences, or a Board of Directors retreat, checking on a rental property, a business location, or even going to meet a prospect or vendor. This includes food, tip, and even the bar tab.
However, it’s true that if you are ALSO going to take out a client or prospect while traveling, their portion of the meal would fall under Type 1 above. This means their share of the meal is now “questionable” and may not be deductible (see above).
Clearly, this creates a bookkeeping nightmare. How do you split up the check between your food and the food for your prospect (assuming you’re picking up the tab)? Crazy! Well, do your best and I try separate it in your ‘books’.
Type 3: Meals with Employees, Club Meetings & Food for Employees
Regrettably, this used to be a 100% deduction prior to passage of the TCJA. However, they are now limited to 50%. These are expenses such as:
- Meals to hold a required lunch meeting on the business premises with your employees (not with your business partners or clients).(IRC Section 274(n)(2) 2018; 274(e)(1) 2018).
- Meals to hold a required business meeting with your employees at an offsite location that passes the definition of a business premise (think hotel and not a restaurant)(IRC Section 274(n)(2) 2018; 274(e)(5) 2018).
- Food in the office for employees and your convenience. For example, bagels on Wednesday, donuts on Friday, coffee maker, water cooler, or even a full blown cafeteria.
- Meetings that include a lunch fee, for example at the Chamber of Commerce or a local REIA club. (IRC Section 274(n)(2) 2018; 274(e)(6) 2018).
Type 4: Year-end parties for employees, marketing presentations, and COGS food expenses
Yes, some types of food expenses survived and are still 100% deductible! These are items where food is paid for in a non-entertainment venue for the general public in a marketing presentation or ‘open house’ if I was a Realtor showing a property. Moreover, you can deduct the food and costs for a team building event, or a year-end party exclusively for employees and not the owners of the business, or highly compensated employees. Consider this an experience for your rank and file employees. (IRC Section 274(n)(2) 2018; 274(e)(4) 2018). These would be situations such as:
- Snacks, food or treats at an ‘open house’ to show a home if you are a realtor
- Snacks or food at a promotional event for customers or prospects
- Food costs as a restaurant, store or similar establishment where the food is a ‘cost of goods sold’ as an item for sale
- Food at an event or workshop in which patrons paid to attend and the food was part of the cost to attend
Substantiating your expenses
In light of these more complicated rules and frankly confusion, it’s more critical than ever to track your expenses carefully in order to allocate and deduct them in the proper manner come next spring. Here is an article on travel and meals regarding substantiation and recording procedures.
Bookkeeping is more important than ever
We are highly recommending our clients create bookkeeping categories/expenses in QuickBooks for these 4 types of meal expenses. This way at the end of the year you can better strategize with your accountant, substantiate your expenses, AND make sure you take the proper percentage (%) write-off for the right type of expense.
10 Takeaways and examples:
- You travel to a conference for your profession and pay for food along the way and during the conference. 50% write-off
- You travel to a business conference and while there take out a customer of yours, discuss business and close a deal. Your meal is a 50% write-off. The expense to take your customer out to dinner should be tracked separately and we expect it to also be a 50% write-off.
- You pay for a required employee meeting at the office and discuss business operations. 50% write-off
- You go out to lunch with an employee for their birthday and flip the tab- Should be tracked separately and we expect it to also be a 50% write-off.
- You and your business partner go to lunch to talk important business- Should be tracked separately and we expect it to also be a 50% write-off.
- You and your board of directors, or board of advisors for your business travel to a location outside of a normal commute for a quarterly or annual meeting in which you take notes and have a business discussion. 50% write-off
- You take a prospect golfing, to a spa, or baseball game, have lunch during or after, talk business and close their future business with your company. No write-off for the meals or activities
- You own a restaurant or convenience store or farmers market and sell food, products or prepared meals. All food is a 100% deduction as a cost of goods sold.
- You hold an event and charge attendees for a conference, training or experience that includes the meal as part of their registration. 100% write-off
- You hold an open house, event or presentation free to the public, and provide snacks, drinks, and food for the attendees. 100% write-off.
Trust me, I’ll keep looking for loopholes AND keep you posted. But in the meantime, I have a MAJOR recommendation. Please send an email to your Congressmen or Congresswoman. Here is how you can reach them:
Bottom line, even with these major tax-law changes, dining and or event and office food can add up to be a significant expense on your books. Keep good track of your food expenses and keep several categories in your QuickBooks. It’s not a big deal to do so and it will give you an important opportunity for a discussion at tax-prep time.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.