Happy holidays–updated meal and entertainment deduction rules are here
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If you are keeping track of the rules related to the Tax Cuts and Jobs Act (TCJA) that are likely to impact you as a freelancer, you’ll want to take note of this one in regard to meal deductions. At the beginning of the year, it looked like the IRS was not going to allow the deduction of 50 percent of food and beverage expenses associated with business operations.
However, this rule was recently clarified to confirm that you can continue to deduct meal expenses as long as they meet the specific guidelines for such deductions.
The good news for freelancers
This is good news for freelancers, especially if you are planning to host client meals this holiday season and for any of the business meal expenses that you may have racked up throughout the year (as long as you have receipts).
Keep in mind, however, that expenses for entertainment, amusement, or recreation in the course of business are not deductible. For example, if you want to treat your client to dinner plus tickets to a show, only 50 percent of the meal expenses would be deductible.
What you can deduct
You can deduct client meal expenses, but they have to be legitimate. As a refresher, here are the requirements for being able to take advantage of the meal expense deduction on your freelance business tax return:
- The meal expense must be reasonable and a necessary as part of your business operations.
- Either you, or an employee of your business, must be present when the meal is eaten.
- The food and beverages you are claiming must be provided to a current or potential business customer, client, consultant, or similar business contact.
- If food and beverages are provided during or at an entertainment activity (i.e. brats and beer at a baseball game) they must be purchased separately from the entertainment on one or more bills, invoices, or receipts.
...and what you can't
In case you were wondering, you cannot try to pass through the cost of any entertainment as a deduction by claiming that the meal or food and beverages you provided is greater than it really was. In addition, you must have receipts to support your meal expense deductions (not just a credit card statement) so be sure to keep those filed with your other tax information.
Beware of the new IRS view on de minimis meal expense deductions for your business.
Aside from the above meal expense deductions, it is important to remember that under the tax reform laws, significant changes to the amount you can deduct for de minimis meal costs were also made.
These expenses related to meals provided on premise by companies to their employees are considered a form of de minimis or “fringe” benefits by the IRS. Typically, de minimis benefits are characterized by a) their low value (a good rule of thumb is the expense is less than $100) and b) the relative infrequency with which they are offered.
It used to be that de minimis benefit expenses were 100 percent tax deductible as a general business expense and included items such as occasional snacks and refreshments provided to employees by an employer or the infrequent provision of money for meals by an employer when employees are working overtime.
The TCJA gradually eliminates these deductions. Starting in the 2018 tax year, the deduction businesses can claim for de minimis meal expenses is reduced from 100 percent to 50 percent. By the 2025 tax year, the ability to deduct these costs is completely eliminated.
In addition, starting in the 2018 tax year, the current 50 percent limit on the deductibility of business meals by individual taxpayers expands to include businesses. This means that any meals provided by businesses on their own premises, such as at a company cafeteria, holiday party or employee picnic—as well as any related operating costs—are no longer 100% deductible. This year only 50 percent of these costs may be deducted by businesses and in 2025 no deduction for these expenses can be taken.
So there you have it—some good news and some not so good news about meal expenses for your freelance business. If you plan to take clients out to eat or to bring treats to the office during the holidays, keep your receipts in your tax file and the above TCJA provisions in your mind.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.