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.
In the past, (2017 and earlier) business owners were able to deduct 100% certain food or dining items, now they are 50%.
Also, there were certain items that were deductible up to be 50% in 2017 and earlier, AND now some of those have disappeared all together. Let’s break it down into some bite size pieces (sorry I couldn’t resist).
Here’s what is now 50% (previously a 100% write-off):
- Meals to hold a required lunch meeting on the business premises with your employees (not with your business partners or clients).
- Meals to hold a required business meeting with your employees at an offsite location that passes the definition of a business premises (think hotel and not a restaurant)
- 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.
Still a 50% deduction saved under the tax reform
- Meals while traveling for legitimate business meetings. Example, education or training, conferences, or Board of Directors retreat. (Remember, traveling is outside of a ‘normal commute’ of your daily business activities).
- 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
100% food deductions that continue to survive
- Food costs as a restaurant, store or similar establishment where the food is a ‘cost of goods sold’ as an items for sale
- Food at an event or workshop in which patrons paid to attend and the food was part of the cost to attend
The problem! – Client and prospect meals
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 The argument is that when the entertainment expense was completely repealed under the Tax Cuts and Jobs Act, by default it grabbed the meals expense under it’s umbrella.
Regrettably, it appears the majority of tax professionals concur that this type of meals expense is no longer a write-off for business owners and the safe bet is to ‘track’, but not ‘deduct’ these expenses until further guidance from Congress or the IRS.
In my opinion, this is an outrageous provision in the new tax law, however I am compelled to be cautious about taking this type of deduction.
Historically, taxpayers have had some success in urging Congress to repeal certain unfavorable tax law. For example, in 1984 Congress passed some aggressive and highly controversial rules regarding the auto deduction. Within nine months, the House and Senate repealed the new law. We can only hope for the same here.
Substantiating your expenses.
In light of these more complicated rules and frankly confusion, its 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.
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 is NOT.
- 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- No write-off
- You and your business partner go to lunch to talk important business- No 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. 50% write-off.
There may be hope…
My personal opinion is that many of these meals when taking out clients or prospects out to lunch or dinner, previously deducted for even 50%, should be an advertising expense. However, that’s just my opinion and I’m not the IRS Commissioner, nor can I vote for the majority of Congress.
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.