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Deducting mixed business expenses under the Tax Cuts and Jobs Act

| Mar 4, 2020 | Tax Law |

The IRS has proposed new regulations on how to deduct business expenses under the Tax Cuts and Jobs Act (TCJA), which added some restrictions and limitations. Previously, taxpayers could deduct 50% of all entertainment, amusement, or recreation expenses as long as they were directly related to their trade or business. Under the TCJA, you can still deduct meals, but the deduction for entertainment, recreation and amusement was removed.

So, what happens when you take your business prospects out for a night on the town? It depends in large part on what your receipts say. If the meal and entertainment expenses are mixed, the IRS says that nothing is deductible. However, if you can get separate receipts for the meal and entertainment, you can still deduct the food and beverages.

Other rules remain in place. You can only deduct food and beverages that are ordinary and necessary to carry out your trade or business (i.e. not extravagant under the circumstances) and only when you or an employee was present when the food and beverages were served.

Here are some examples that illustrate what to do with mixed business expenses:

You take your prospect to a suite at a baseball game where food and beverages are served during the game.

  • If you pay for the entire outing on one invoice, you can’t deduct any of it.
  • If you pay separately for the food and beverages but they were discounted as part of the suite package, you can’t deduct anything.
  • If you pay separately for the food and beverages and they were provided at the venue’s usual rate, you should be able to deduct 50% of the food and beverages.
  • If the receipt spells out the cost of the food and beverages and they were provided at the venue’s usual rate, you should be able to deduct 50% of the food and beverages.

Employee meals may also be deductible

Under the new law, food and beverage expenses are only deductible to the extent they are for a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

This means that food you provide to an employee at a business event should be 50% deductible, which is a big change from previous law.

You may generally assume that these rules apply to your 2019 taxes, although the regulations have not yet been implemented. This is because they are very similar to transitional guidance provided by the IRS in Notice 2018-76.

The proposed regulations will be up for a public hearing on April 7.

We insist that your taxpayer rights are protected and your options are known.

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