Business Meals Before, During or After the Game.
Atlanta businesses used to enjoy a tax deduction for taking clients to the Atlanta Braves, the Hawks, the Falcons and other sporting and entertainment events. The same was true for college games (Georgia Bulldogs, Georgia State Panthers and the Georgia Tech Yellow Jackets, just to mention the teams nearest my office in Sandy Springs). Taxpayers also used to enjoy a tax deduction for business meals consumed at the games.
The rules changed in 2017, eliminating the tax deduction for all business expenses related to entertainment, amusement or recreation, including sporting events. However, the 2017 rules were unclear about how to treat the cost of meals eaten at an entertainment event. Are the meals non-deductible, partially deductible or fully deductible?
The IRS came to the rescue in September, 2020 with new rules to clarify the ins and outs of the deduction for business meals in conjunction with sporting events and other forms of entertainment. These rules will impact many Atlanta-based business owners.
The 2017 exclusion of tax deductions for entertainment expenses includes the cost of tickets to events, as well as dues, fees or membership to any social, athletic or sporting club.
The IRS clarified in its 2020 rules that the exclusion of entertainment expenses only includes food or beverages if they are provided at or during an entertainment activity.
The IRS further specified in its new rules that the exclusion of entertainment expenses does not apply to food or beverages that are separately purchased or separately stated from entertainment costs.
The IRS also noted that a deduction is allowed for food or beverages only if the expense is not lavish or extravagant. Also, the taxpayer, or an employee of the taxpayer, must be present when the food or beverages are furnished.
Examples of Business Meals at Sporting Events
Example 1: X invites Y, a business associate, to a college basketball game to discuss business where X purchases the tickets for both X and Y. The college basketball game is considered entertainment and therefore X cannot deduct the cost of the tickets.
Example 2: Given the same facts as Example 1, except that in addition to the cost of tickets, X buys Y dinner in the alumni tent before the game. The cost of dinner, which is purchased separately from the cost of the tickets, is not considered entertainment and is therefore deductible. However, the dinner is subject to the 50% limit on expenses for meals.
Example 3: X invites Y, a business associate, to a college basketball game and purchases two tickets for them to attend the game in a suite in the college’s arena, which includes the cost of all food and beverages. The cost of the tickets is considered entertainment and is not deductible. Likewise, since the food and beverages are not purchased separately from the tickets, the cost of the food and beverages is considered entertainment and nondeductible.
Example 4: Given the same facts as in Example 3, except that the invoice X received separates the cost of the tickets from the cost of the food and beverages. Similarly to Example 3, the cost of the tickets is deemed to be nondeductible entertainment. However, the costs of the food and beverages, which are stated separately on the invoice and are at the usual price charged by the college’s concession stand if purchased separately, are not deemed to be entertainment expenditures. Therefore, X may deduct 50% of the cost of the food and beverages as a meal expense.
Accounting for Meals
Small business owners need to be sure that their accounting system identifies fully deductible, partially deductible and non-deductible meal and entertainment expenses. Simply modify the chart of accounts in QuickBooks, Xero, Bench Accounting or whatever software you use by creating unique expense categories. This, along with keeping copies of your receipts, will help to audit-proof your tax return.
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm located in Atlanta, GA, serving the needs of small businesses, business owners and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation, IRS audits, monthly bookkeeping and accounting.