750 / Can business meals and entertainment expenses continue to be deducted under the 2017 tax reform legislation? What guidance has the IRS provided on this issue?

Editor’s Note: The 50 percent limit discussed below was lifted for 2021 and 2022, so that business meal expenses were entirely tax deductible if they otherwise qualified for the deduction and the expense was incurred in a restaurant.

Prior to 2018, expenses for business meals and entertainment were required to meet one of two tests, as defined in regulations, in order to be deductible. The meal had to be: (1) “directly related to” the active conduct of the trade or business, or (2) “associated with” the trade or business. Generally, the deduction for business meals and entertainment expenses was limited to 50 percent of allowable expenses.¹ The 50 percent otherwise allowed as a deduction was then subject to the 2 percent floor that applies to miscellaneous itemized deductions.²

Under the 2017 TCJA, the deduction for all business-related entertainment expenses was repealed. However, the 50 percent deduction for food and beverage expenses was retained. It seems clear that food and beverages consumed while traveling for business continue to be deductible subject to the 50 percent limit. The 2025 OBBB generally extended the TCJA treatment but created an exception so that the 50 percent limit will not apply to meals provided to employees on certain fishing vessels and at certain fish processing facilities.³

Costs associated with meals and beverages provided for the convenience of the employer (i.e., meals brought to the office when employees are working late or provided through an onsite dining facility) are deductible subject to the 50 percent limit, but only through 2025.

The IRS has released a technical advice memorandum (TAM) that sheds light on the potential tax implications when employers provide employees with free meals in the office. Post-tax reform, meals provided “for the convenience of the employer” may receive favorable tax treatment. In the TAM, the IRS denied exclusion of the meals’ value from employee compensation. In the scenario presented, the employer provided free meals to all employees in snack areas, at their desks and in the cafeteria, justifying provision of these meals by citing need for a secure business environment for confidential discussions, employee protection, improvement of employee health and a shortened meal period policy. The IRS rejected these rationales, stating that the employer was required to show that the policies existed in practice, not just in form, and that they were enforced upon specific employees. In this case, the employer had no policies relating to employee discussion of confidential information and provided no factual support for its other claims. General goals of improving employee health were found to be insufficient. The IRS also considered the availability of meal delivery services a factor in denying the exclusion, but indicated that if the employees were provided meals because they had to remain on the premises to respond to emergencies, that would be a factor indicating that the exclusion should be granted.

Post-tax reform, employees are permitted to exclude the cost of employer-provided meals furnished to employees on the premises and for the employer’s convenience. The IRS guidance clarifies that the previously applicable standard, which requires that the meals are deemed to be provided for the employer’s convenience only if they are necessary for employees to properly perform their duties, will continue to apply even post-reform. Employers who wish to provide meals under this “convenience of the employer” provision must be able to substantiate that they have policies in place reflecting the need, and must be able to show that those policies connect the employer’s stated needs and goals to the necessity of providing employee meals. Sufficient substantiation will depend on the facts and circumstances of each case.⁴

The IRS has provided further guidance on the matter of whether food or beverages with a client before or after an event that is clearly categorized as “entertainment” continue to be deductible subject to the 50 percent limit, or whether they will be categorized as pure “entertainment” expenses. The 50 percent deduction for business meal expenses will continue in effect under the 2017 tax reform legislation under certain circumstances even if provided in connection with non-deductible entertainment expenses. In general, business owners may continue to deduct 50 percent of business meal expenses that are ordinary and necessary expenses, so long as the meal is not lavish or extravagant under the circumstances. The meal or beverages must also be provided to current or prospective business associates, and must be purchased separately from any entertainment activities that are taking place simultaneously. It is also permissible that the cost of the food and beverages be separately stated from the cost of the entertainment on a receipt.⁵

In general (both pre- and post-reform), the taxpayer or his employee generally must be present for meal expenses to be deductible, and expenses that are lavish or extravagant may be disallowed. Substantiation is required for lodging expenses and, in the case of expenditures incurred on or after October 1, 1995, for most items of $75.00 or more.⁶ An employee must generally provide an “adequate accounting” of reimbursed expenses to his employer.⁷