Yes, Tax Reform Did Kill Prospect and Client Meal Deductions

You may already know by now that with what you and I thought was a business-friendly tax reform package, lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or other specific business benefit. The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.

Now, what about taking a client or a business prospect to lunch at a trendy restaurant?

Go right ahead and enjoy the meal. Just don't expect Uncle Sam to help pay for it.

You see, thanks to the same tax reform, you can no longer deduct business meals. Those write- offs are dead and gone.

You likely have heard conflicting information on the deductibility of business meals with clients and prospects.

I have spent time researching this issue, and my conclusion is that tax reform eliminated tax deductions for business meals with clients and prospects.

To see the changes in a technical way, let’s review what tax reform did to make the business meal non-deducible:

• Removed directly related and associated entertainment from IRC Section 274(a), including business meals
• Removed entertainment, including business meals, from the substantiation expense requirements of IRC Section 274(d).
• Removed Section 274(n)(1) from the tax code. This section applied the 50% rule to entertainment, including business meals.

The repeal means the rules that allowed the client and business meals when directly related to or associated with the active conduct of your business are now gone!

Here are some examples of the way we see business meals after tax reform:

1. Joan owns a tax practice and takes Cindy, a prospect, to lunch and pays for the two of them. Now, because of tax reform, this lunch is not deductible.
2. Tom and Jim are both dentists in private practice. They go to dinner to discuss a new piece of equipment that could benefit their practices. They each pay for their own meal. They get no deductions. Because of tax reform, Dutch-treat business meals are no longer deductible.
3. Jack takes a client of many years out to dinner to help him with his business plans for this year. They review the plans in detail. The client picks up the tab. Jack’s client may not deduct the business meal.

I’m sure you agree with me. The loss of the meal is a sad deal. We hope that lawmakers will reconsider and reinstate the client and prospect meal deductions.

On the other hand, a few categories of meal expenses survived. And to maximize the remaining meal deductions, it now becomes critical to modify how accounting for meals is done in your accounting system and software. But more on this subject in a later post.