Expenses: Know what’s deductible and substantiate

Sarah Fischer

When owners, managers and salespeople attend trade shows, call on customers or evaluate suppliers, they might incur meal, travel and entertainment expenses. Many of these expenses could be deductible if they’re properly substantiated. But some of the rules have changed under the Tax Cuts and Jobs Act (TCJA).

Business “entertainment” expenses used to be lumped in with meal and travel expenses and were 50 percent deductible. The rules for entertainment expenses have changed dramatically under the TCJA. Specifically, it disallows deductions for most business-related entertainment expenses, including the cost of facilities used to entertain customers. Examples of nondeductible entertainment expenses under the TCJA include:

Tickets to sporting events.

License fees for stadium or arena seating rights.

Private boxes at sporting events.

Theater tickets.

Golf club dues and greens fees.

Club memberships.

Entertainment-related meals — that is, meals at which no business is conducted.

Company golf outings for customers.

Hunting, fishing and sailing outings.

Some business-related entertainment expenses could still be deductible, but only in limited circumstances. These circumstances include entertainment presented at an event open to the public and expenses associated with social activities for employees, such as office parties and team bonding activities.

The cost of food and beverages purchased at entertainment events may be 50 percent deductible if the following requirements are met: meals are stated separately from the cost of entertainment on invoices, the taxpayer or taxpayers’ employees are present, the meals are provided to a business associate or client and business matters were discussed.

The deductibility of entertainment expenses also varies depending on the taxpayer’s type of business. For instance, a fishing guide incurring expenses for fishing trips with clients remains deductible as an ordinary and necessary business expense. On the other hand, a flooring distributor wouldn’t be allowed a deduction for a fishing trip with clients as non-deductible entertainment.

Meals as a business deduction generally remain 50 percent deductible under TCJA. There are some changes worth noting, however:

Client business meals were previously 50 percent deductible if the taxpayer was present and the meal was neither lavish nor extravagant. Under the new rules, the deductibility of these meals now requires business to be conducted or discussed to get a deduction. Otherwise, the meal will be considered business entertainment and, therefore, non-deductible.

Meals provided for employer’s convenience and meals provided occasionally to employees were previously 100 percent deductible as a de minimis fringe benefit. These expenses are now 50 percent deductible and will be nondeductible after 2025 if legislation isn’t enacted to change this.

Similarly, office water, coffee and snacks were previously 100 percent deductible as a de minimis fringe benefit. These expenses are now 50 percent deductible and nondeductible after 2025.

As a result of the above changes, proper documentation will be increasingly important to substantiate the business purpose of meals. 

You must keep detailed records to substantiate any business expense. But it’s especially important for meals, entertainment and travel expenses. Why? These expenses are IRS hot buttons, so those records are likely to be scrutinized if you’re audited.

Proper substantiation includes details about the expense: the amount, time and place, purpose and a listing of those in attendance and their relationship to the taxpayer.

Meals incurred while an employee is traveling for business are still 50 percent deductible. If you reimburse employees for meal and travel expenses, make sure they’re complying with the rules. Enforce a policy that requires timely expense report submission. It’s almost impossible to recreate expense logs at year end or wait until the IRS sends a deficiency notice.

Finally, track meals and entertainment expenses separately. If you continue to lump these expenses into the same account, you’ll likely create a time and expense burden when tax time rolls around and your tax accountant has to break out meals from nondeductible entertainment.

If you haven’t done so already, it’s important to assess your company’s expense allowance policies to determine if the TCJA provisions warrant changes — especially for meals and entertainment expenses.