With the business entertainment deduction repealed for tax years 2018-2025, some people (including us) were left wondering if going out to dinner with a business associate or taking clients to happy hour is considered "entertainment" and therefore not deductible.
To provide interim guidance, the IRS issued Notice 2018-76, which states that business meals aren't treated as entertainment (which means they're still 50% deductible—except in tax years 2021 and 2022 only, where businesses can generally deduct the full cost of business-related food and drinks bought from a restaurant) as long as all five of these conditions are met:
- The expense is an ordinary and necessary expense in conducting the trade or business
- The expense isn't lavish or extravagant under the circumstances*
- The taxpayer or their employee is present at the meal
- The meal is provided to a current or potential business customer, client, consultant, or similar business contact
- For meals provided at or during an entertainment activity, the meals are either purchased separately from the entertainment or the meal and entertainment costs are separately stated on a bill, invoice, or receipt†
*If a nice dinner for two costs around $75 in your area, but the bill at your favorite high-end establishment came in at $200, you can take a deduction on the reasonable $75 portion of the bill, but not the "lavish and extravagant" $125 portion.
†For example, if you took a client to a ball game and purchased beer and hot dogs for the two of you, the cost of the food and drink (but not the tickets) would be deductible. If you rented a skybox suite and the food and drink were either purchased separately or called out separately on the invoice, you could deduct the meals, but not the skybox rental. But if you paid one set price for the skybox which included food and drink, you can't deduct any of it.