Meals and Entertainment Deductions and Business Expenses

By Connor Smart December 9, 2024

For those with an appetite for arcane tax compliance and regulatory due diligence, the ever-expanding U.S. Tax Code leaves no shortage of bounty to feast upon.

In 2017, lawmakers passed the Tax Cuts and Jobs Act (“TCJA”, or “the Act”) and made very significant changes to a myriad of tax rules, procedures, and standards. These changes were covered in one of our previous articles, Tax Deductibility of Meals and Entertainment Expenses, which you can still find and read on our website.

The TCJA, when originally enacted, contained many “pay-for” and “sunset” provisions. These aspects of the Act were designed to help balance the budget of other more costly sections of the TCJA, where the Act either expanded deductions or lowered tax rates. The changes to the meals and entertainment deductions largely fell into this former category and were designed to save the government money by disallowing what were previously allowed deductions; compared to the historic standard, after the TCJA became effective, businesses were subject to much stricter rules and greater limitations on their ability to deduct expenses for meals and entertainment.

Now that the 2024 election is behind us and another Trump administration is inbound in January of 2025, and given that many parts of the TCJA are anticipated to be sunset pending an act of Congress in 2025, it seems a timely opportunity to review these past changes and to consider the meals and entertainment deduction rules as they apply to the 2024 tax year nearly concluded as well as the upcoming 2025 tax year.

Meal, food, and beverage expenses

Following the TCJA, meal expenses fell into multiple tranches of deductibility: some are 100% deductible, some are limited to 80%, others to 50%, and some unfortunate leftovers are stuck being disallowed entirely.

100% deductible meal expenses

TCJA still allowed meal expenses that meet one of the following criteria to be 100% deductible:

• They are treated as taxable employee compensation.
• They are reimbursed by a third party under an accountable plan.
• They are for recreational, social, or similar activities primarily for the benefit of non-highly compensated employees (this exception does not apply to club dues).
• They are for goods, services, or facilities made available to the general public.
• They are sold in a bona fide transaction for adequate and full consideration.
• They are includible in the income of an independent contractor as compensation for services, but only if the amount is properly reported on a Form 1099-MISC if the amount is $600 or more.
• They are provided to crew members of certain commercial ships or to workers on certain offshore oil or gas platforms (the specific rules governing this provision can be found in Code Section 274(n)(2)(C)).

In other words, some of the more common 100% meal deductions – meal expenses picked up as income to the recipient, or meal expenses for employee parties or social functions – continued to apply under TCJA. Furthermore, pending any unforeseen acts of Congress, these 100% deductible allowances will continue to apply in 2025 and beyond.

50% deductible meal expenses

The 50% deduction limit is the catch-all default category for any meal expenses which do not appropriately fall into the 100% deductible categories described above but do have a business purpose. This would include the following common examples:

• Business purpose meal expenses, such as those incurred as part of business-related meetings.
• Food and beverage costs provided to employees as de minimis fringe benefits (imagine coffee and snacks in the breakroom).
• Food and beverage costs provided for employees on the employer’s premises and for the convenience of the employer.
• Meals provided on an occasional basis to help employees work overtime.

Importantly, to qualify for the 50% deduction, such meal and beverage expenses cannot be lavish or extravagant given their case-by-case circumstances. What “lavish or extravagant” means in this context and in the view of the IRS is best summarized by the words of Supreme Court Justice Potter Stewart: “I know it when I see it.” While not clearly defined, the IRS does state that meal expenses that are “lavish or extravagant” are non-deductible.

Unlike the 100% deductible category, some of the 50% deductible expenses will change due to TCJA sunset provisions in the near future. After 2025, expenses for the operation of on-premises food and beverage facilities and expenses for meals provided for the convenience of the employer will be completely disallowed. At this time, there appear to be no plans to defer or eliminate this sunset.

80% deductible meal expenses

In an odd in-between category, expenses for food and beverages are 80% deductible if the food or beverage is consumed while away from home by workers during periods when they are subject to hours-of-service limitations imposed by the federal Department of Transportation.

Given this highly specific use-case, it is unlikely many taxpayers will have use of this 80% limitation, but it is listed here as an honorable mention.

Entertainment expenses

Regrettably for sports and opera fans across the nation, the TCJA greatly expanded the restrictions on deducting entertainment expenses; the Act simply disallowed (with very limited exceptions) 100% of any deduction for any activity “of a type generally considered to constitute entertainment, amusement, or recreation,” or concerning a facility used in connection with such an activity. There are two general exceptions to the 100% disallowance, in which certain entertainment expenses may still be 50% deductible:

1. Expenses which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors; and/or
2. Expenses directly related and necessary to attend a meeting or convention of an organization which is tax-exempt under Code Section 501(c)(6).

For anyone who has fancied a dinner and a show, this raises the question – what if meals and entertainment expenses occur concurrently? Under Treasury Regulations Section 1.274, food and beverages are not considered entertainment expenses unless the food or beverages are provided during or at an entertainment activity. However, food and beverages at an entertainment activity would generally be able to escape classification as an entertainment expense if they are purchased or billed separately from the entertainment.

In other words, to deduct certain meals expenses incurred in conjunction with certain entertainment expenses, one must:

• Keep a separate itemized list and receipt of the meal and entertainment costs, and ensure they are valued and accounted for separately.
• Ensure that the food and beverage costs are not themselves inherently connected to the “entertainment” cost source.
• Ensure the cost of the meal is not lavish or extravagant under the circumstances.

If these points can be met, a taxpayer may still be able to deduct the cost of meals (either 50% or 100%, depending on the circumstances), even if there is an adjacent entertainment event.

Unlike other parts of TCJA, these limitations will not go away as part of the sunset provisions of the Act. In other words, pending Congress and the President signing a new tax bill, these limitations and restrictions that have applied since 2018 will continue to apply in 2025 and beyond.

Final summary

TCJA imposed dramatic changes on the entire Tax Code, and the impact to meals and entertainment expenses was just one small slice of the pie. Without ever being seriously addressed by revisionary tax bills, right now, the chart below summarizes where these expenses were, how they’ve been, and where they’re going:

 

	Deduction Allowed by Period
Expense Type	Pre-2017	2018 – 2025	Beyond 2025
Company social functions and non-discriminatory employee events	100%	100%	100%
Entertainment events	50%	0% / 50%*	0% / 50%*
Employee meals while traveling	50%	50%	50%
Business purpose meals	50%	50%	50%
Meals for the convenience of the employer / On-premises food and beverage facilities	50%	50%	0%
De minimis fringe benefit meals	100%	50%	50%

For more information, please contact Connor Smart or your BNN tax advisor at 800.244.7444.