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Business Meals Deductions Under TCJA
Jan 08, 2019
by Gregory S. Dowell
January 8, 2019
Following the Tax Cuts and Jobs Act (TCJA), there has been considerable confusion over the deductibility of expenses for business meals. Unfortunately, it is not crystal clear in all cases when business meals provided to clients and business associates are deductible. The confusion stems from the change brought about by the TCJA on January 1, 2018, when entertainment, amusement, or recreation expenses for clients and business associates are no longer allowed as business deductions.
While the IRS will continue to issue guidance, a taxpayer needs to understand some basics about deducting business meals, as well as the limitations:
- Ordinary and necessary business expenses – All business expenses must meet the general deductibility requirement of being “ordinary and necessary” in carrying on the business. These terms have been fairly broadly defined to mean customary or usual, and appropriate or helpful. Thus, if it is reasonable in your business to take clients or other business people out to restaurants or otherwise provide them with meals or refreshments you should be able to pass this general test.
- “Directly related” or “associated with” – A second level of tests specially applicable to meal expenses must also be satisfied. Under them, the business meal must be either “directly related to” or “associated with” the business.
- “Directly related” means involving an “active” discussion aimed at getting “immediate” revenue. Thus, a specific, concrete business benefit is expected to be derived, not just general goodwill from making a client or associate view you favorably. And the principal purpose for the meal must be business. Also, you must have engaged actively during the meal, via a meeting, discussion, etc.
- The directly related test can also be met if the meal takes place in a clear business setting directly furthering your business, i.e., where there is no meaningful personal or social relationship between you and the others involved. Meetings or discussions that take place at cocktail parties—which are essentially social events—wouldn’t meet this test.
- If the “directly related” test can’t be met, the expense may qualify as “associated with” the active conduct of business if the meal precedes or follows (i.e., takes place on the same day as) a substantial and bona fide business discussion. This test is easier to satisfy. The “goodwill” type of meal at a restaurant can qualify. The meal will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship. You (or an employee of yours) must be present. That is, for example, if you simply cover the cost of a client’s meal after a business meeting but don’t join him at it, the expense doesn’t qualify.
- Substantiation – Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. The use of reasonable estimates isn’t sufficient to stand up to IRS challenge. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. Obviously, you must set up careful and detailed record-keeping procedures to keep track of each business meal and to justify its business connection. For expenses of $75 or more, documentary proof (receipts, etc.) is required.
- Deduction limitations – Several additional limitations apply. First, expenses that are “lavish or extravagant” aren’t deductible. This is generally a “reasonableness” test and doesn’t impose any fixed limits on the cost of meals. Expenses incurred at first class restaurants or clubs can qualify as deductible.
Once the expenditure qualifies, it is important to note that it is only 50% deductible. Obviously, this rule severely reduces the tax benefit of business meals. If you spend about $50 a week on qualifying business meals, or $2,500 for the year, your deduction will only be $1,250, for tax savings of around $300 to $400.
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by Gregory S. Dowell Updated May 16, 2023 Spring is the traditional kick-off to wedding season, and thoughts quickly turn to the wedding venue, gifts, the happy couple, and, of course, the guest list. Lurking somewhere in the shadows, behind even that strange uncle you barely know, is another guest that needs to be considered: The tax impact on the newlyweds. To start, newlyweds will have two options for filing their income taxes in the year of marriage: Filing status can either be married filing jointly, or married filing separately. In the vast majority of cases, a couple will benefit with a lower overall tax burden to the couple by choosing to file married filing jointly. One of the classic cases where a couple may consider filing separately is when one spouse has significant amounts of medical expenses for the year. Medical expenses are only deductible if they exceed 7.5% of adjusted gross income; using only one spouse's income may allow a deduction to be taken if filing separately, compared to losing the medical deduction entirely if both incomes are combined by filing jointly. We previously had written about the tax trap that often occurs when two people get married, resulting often in an unanticipated balance due when the first joint tax return for the couple was filed. While President Trump’s Tax Cuts and Jobs Act (TCJA), changed the dynamics somewhat, it is still worthwhile to put pen to paper before saying “I do”. Prospective spouses have the opportunity to save money by taking income tax considerations into account before tying the knot. That’s particularly true for those who plan to marry late this year or early next year. As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year. For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household income tax return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket. For example, if two individuals who each have $215,950 of taxable income file as single taxpayers for 2022, each would have a tax bill of $49,335.50, for a combined total of $98,671. If they were married, their tax bill as marrieds filing jointly would be $98,671, exactly the same amount as the combined total tax they’d pay as single taxpayers. Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in the 35% bracket. Using 2022 tax tables, two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $647,850 in taxable income, and each additional dollar of taxable income taxed at 37%. Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $539,900 of taxable income file as single taxpayers for 2023, each would have a tax bill of $162,718, for a combined total of $325,436. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $334,076, or $8,640 more than the combined total tax they’d pay as single taxpayers. If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible. There are a number of other factors that should also be taken into account when determining the effect of a marriage on income taxes of the couple. As mentioned early in this post, the first decision is to verify that filing a joint return is preferred to filing separate returns. In addition, many provisions of the tax code phase out completely (or decrease partially) as adjusted gross income increases. In a perfect world, there would only be good surprises for a newlywed couple following their wedding. To avoid any unpleasant income tax surprises, we always recommend that a newlywed couple take the time to make a projection of what their income will look like when combined as a couple, and determine what the tax bill will look like, at the Federal and State levels. After all, planning ahead, communicating with each other, discussing finances, and avoiding unpleasant surprises are some of the keys to a long marriage.
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