It has never been easy to make it as a small business. Taxes are one of many concerns for small business owners and freelancers who have relied on business expenses in the past to help offset high tax rates.
One example is meals and entertainment related to business. For years small business owners were able to deduct these expenses when they involved work. However, the recent Tax Cuts & Jobs Act changed that luxury and many others.
Can small business owners still deduct meals and entertainment from their federal taxes? The answer to that question is a little complicated so let’s dive into the details…
Meals & Entertainment Related to Business Expenses
In the past, businesses were allowed to deduct 50% of the cost of meals and entertainment if the expenses were related to the company. It was a helpful deduction for industries that rely heavily on “wining and dining” clients, customers, or other associates.
For example, the sales department of a business is used to taking out prospective clients to meals or functions in order to leave a good impression. Half of those business-related expenses were able to be deducted from taxes at the end of the year.
Meals & Entertainment Business Expense Changes
The Tax Cuts & Jobs Act officially went into effect for the 2018 tax year and altered how nearly everyone files taxes in one way or another. Businesses were forced to endure a number of changes, including those to meals and entertainment business-related expenses.
The new tax law indicates that business meals are still deductible up to 50% of the cost. However, you can no longer deduct the cost for entertainment, even if it was related to the same business meeting.
For example, it is still possible to take a customer out to dinner and deduct half of the meal for tax purposes, but if that same meal turns into attending a baseball game, any costs associated with seeing the game (tickets, parking, concessions, etc) are not deductible.
But what about when dinner and entertainment are combined, such as at a dinner-theater show?
Business meals and entertainment have always operated on an honor system with the IRS. Unless you are audited, it was a privilege the IRS granted small business owners and other freelancers, trusting that the expenses were indeed related to work. The problem is too many individuals have abused the privilege in the past, which is likely part of the reason the deduction was reformed.
Personal judgment is still used by the small business owner, freelancer, or independent contractor. Are you really conducting business during this meal? If the answer is ‘yes,’ then you should be safe. Just know that you can be audited for misuse of business-related dinner expenses.
Employees and Work Meal Deductions
Employees are also no longer able to claim miscellaneous itemized deductions on income tax returns for the cost of business meals. What you eat at work, even if the job sent you away for the day, is not deductible while on the clock.
The only exception is regarding a freelancer or independent contractor. Those individuals who have a meal while conducting business or meeting someone else for business are allowed to deduct 50% of the meal.
Some small business owners may feel the impact of no longer being able to deduct entertainment costs, especially if thousands of dollars are invested each year in entertaining clients or customers.
However, business meals are still deductible at 50%, and office parties and picnics are 100% deductible.
For more questions regarding business meal and entertainment costs, as well as other business expenses, please contact Levy & Associates. We have helped small business owners for over twenty years.
Call us at 800-TAX-LEVY, or visit www.levytaxhelp.com.