Before passage of the Tax Cuts and Jobs Acts (TCJA), both meals and entertainment for clients and business associates were 50 percent deductible for tax purposes as long as business was discussed before, during or after the meal. Expenses for entertainment, amusement and recreation are no longer deductible starting in 2018. However, the wording in the TCJA was unclear on whether meals are now included in the overall definition of “entertainment.”
Tax practitioners have been waiting on clarification, and the IRS finally issued guidance at the beginning of October. According to the IRS notice, taxpayers can continue to deduct 50 percent of business meals expense if all of the following are true:
- The taxpayer (or employee) is present.
- The meals are not considered lavish or extravagant.
- The meals are with a current or potential business contact, such as a lunch with a potential new doctor for the clinic or a medical device representative.
Additionally, food and beverages bought during entertainment events will not be considered entertainment (and are therefore 50 percent deductible) as long as they are purchased separately. For instance, if you take a business associate to a golf tournament, the cost of tickets is not deductible. However, if you purchase drinks and food from concessions, these expenses remain 50 percent deductible for tax purposes.
Changes to Employee Meals
The TCJA also changed the deductibility of employee meals. Meals provided for the convenience of the employer, such as meals provided when working late, are now only 50 percent rather than 100 percent deductible. In 2025, the deduction for these types of meals is scheduled to expire.
Meals brought in for valid business meetings, such as a monthly meeting for all the doctors in a practice, remain 50 percent deductible. Meals for employee travel also remain 50 percent deductible. Meals for employee recreation or social functions, such as office Christmas parties, are also unaffected by the TCJA and remain 100 percent deductible.
Overall, this is good news for physician practices. Physicians can keep deducting lunch meetings as before. Christmas parties, travel meals and meals with business contacts generally remain unaffected by the TCJA. It will be important to keep a separate account for meals provided for the convenience of the employer, as these are now only 50 percent deductible and will be nondeductible in a few years. Also, it will be helpful to keep meal and beverage purchases separate from nondeductible purchases related to entertainment events.
This article is the fourth and final one in a series on the provisions of the TCJA and their impact on the healthcare sector. See our third article, Time to Change Entity Structure? Maybe Not, and also the recently updated article on depreciation, Do You Want the Good News About Depreciation First? We will be watching for any additional IRS clarifications relevant to healthcare entities and will issue more tax reform articles as needed. Consult with your HORNE LLP tax advisor on how these proposed regulations will affect you.