The tax deduction for meals and entertainment expenses for US businesses have been a topic of interest for many years. These deductions were first mentioned in the Internal Revenue Code (IRC) in 1926, when the tax code was first established, and have undergone various changes since then.
Internal Revenue Code 162(a)(2) states that “traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business;” It is important to note that the IRC did not place an amount on either the deduction percentage or where something is determined to be “lavish or extravagant.” These have been topic of discussion, opinion, and tax law for many years. Many revisions have been made over the years.
Initially, businesses were allowed to deduct their meal and entertainment expenses under the provisions of IRC Section 162(a). This was done to encourage businesses to spend money on activities that would promote their business growth and generate more tax revenue for the government.
Changes to the law have been enacted, including the Tax Reform Act of 1986 (P.L. 99-514), which stated the meal deduction would be 80%. In 1993, the percentage of the entertainment deduction was reduced to 50% as a part of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66).
This percentage was further modified by the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) and finally, it was repealed under TCJA in 2018. The deduction amount for meals and entertainment was made to encourage business for restaurants and entertainment establishments hit hard by the Covid-19 pandemic. While this may still be the case when you read this article, it is important to seek guidance regarding current legal, tax, and other guidelines for deducting these expenses.
Over the years, there have been several court cases that have addressed the meals and entertainment deductions. The most notable of these is the case of Commissioner v. Groetzinger, 480 U.S. 23 (1987), in which the Supreme Court held that the deductions are not limited only to expenses that are directly related to the active conduct of a trade or business, but also include expenses that are necessary for the “production of income.”
The meals and entertainment deductions benefit businesses by allowing them to deduct a portion of the expenses incurred in promoting their business and expanding their operations. These expenses can include things like client meals, business trips, and company events. By providing these deductions, the government encourages businesses to invest in activities that promote growth, which in turn generates more tax revenue for the government.
It’s important to note that different states have different laws regarding meals and entertainment tax deductions. Some states may conform to the federal tax laws while others may have their own set of rules. For instance, states like California and New York have state-specific limits on meals and entertainment deductions that are different from the federal limits.
Business entities eligible to take these deductions are generally sole proprietorships, partnerships, S-corporations, C-corporations, and LLCs. However, tax laws and deductions may vary depending on the legal structure of the entity and the state laws.
In summary, meals and entertainment tax deductions have been part of the US tax code since its inception in 1926. The deductions have undergone several changes over time, with the percentage of the deduction being reduced from 100% to 80% to 50% and later repealed. These deductions benefit businesses by encouraging them to invest in activities that promote growth, which in turn generates more tax revenue for the government. It’s important for businesses to be aware of the state laws and regulations in addition to the federal laws when it comes to meal and entertainment deductions.
None of this article is meant to be legal or tax law advice. It is an informative article meant to assist in researching the subject it covers. Every individual and business is unique and will have its own circumstances to deal with. At BCA we provide specialized advice and work with licensed legal and tax professionals to ensure our clients receive the best advisory services possible.
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