tax deductions

Understanding Business Meal and Entertainment Deductions for 2024: What You Can and Can’t Write Off

Ken Botwinick, CPA | 12/04/2024

If you’re unsure about the rules for deducting business meals and entertainment expenses, you’re not alone. Recent changes to federal tax laws have left many business owners seeking clarity. Below we will break down what you can and can’t deduct in 2024 to help you maximize your tax benefits while staying compliant with IRS regulations.

Current Rules for Business Meal and Entertainment Deductions

The Tax Cuts and Jobs Act (TCJA) significantly altered the landscape for deducting business-related entertainment expenses. Most entertainment costs, such as treating clients to golf outings or sporting events, are no longer deductible.

However, business-related meal expenses remain partially deductible. You can generally write off 50% of the cost of food and beverages, provided they are related to business activities or consumed during business-related entertainment.

What Food and Beverage Costs Are Deductible?

The IRS broadly defines food and beverage expenses to include everything from meals to snacks, as well as associated costs such as sales tax, delivery fees, and tips. For these costs to qualify as 50% deductible, the following conditions must be met:

Purchased Separately: The food and beverages must be purchased separately from entertainment activities. Alternatively, they can appear as a separate item on a bill, invoice, or receipt showing the standard selling price of the food and beverages.
Reasonable Value: If they aren’t purchased separately, you can deduct 50% of the reasonable value of the food and beverages.

Key Requirements for Business Meal Deductions

For a 50% deduction to apply, the following conditions must be satisfied:

The meal must not be lavish or extravagant under the circumstances.
You or an employee of your business must be present at the meal.
The meal must involve a business associate — someone with whom you expect to conduct business, such as a client, prospective customer, supplier, or employee.

Pro Tip: You can even deduct 50% of the cost of a business meal for yourself, such as when working late into the night.

Deductions While Traveling on Business

When traveling for work, you can deduct 50% of the cost of meals. However, it’s important to keep detailed records, including receipts, to substantiate your expenses.

Note that meal expenses for spouses, dependents, or others accompanying you on a business trip are generally not deductible unless:

The individual is an employee of your company.
The trip is for legitimate business purposes.

100% Deductible Business Meal and Entertainment Expenses

Certain meal and entertainment expenses remain 100% deductible under IRS regulations, including:

Employee Events: Costs for recreational activities benefiting all employees, such as holiday parties or team-building events.
Public Events: Food, beverages, and entertainment offered at promotional events open to the public.
Customer Sales: Meals or entertainment sold to customers at full value.
Taxable Compensation: Costs reported as taxable income to employees or non-employees (e.g., a prize dinner cruise reported on Form 1099).
Restaurant or Catering Businesses: Food and beverages provided to paying customers and consumed by employees at the worksite.

Navigating Complex Rules

Understanding IRS rules for business meal and entertainment deductions can help you reduce your taxable income, but the regulations can be nuanced. For example, mixing entertainment and meal expenses on the same bill can create complications unless they are clearly itemized.

Bottom Line

While deductions for business-related meals and entertainment expenses are still available in some situations, navigating the rules requires careful attention to detail. Maximizing these deductions can save you money, but compliance is essential to avoid IRS scrutiny.

Have questions or need assistance with your business deductions? Contact us today to ensure you’re leveraging every allowable tax benefit.

Optimize Your Business Tax Strategy in 2024

Understanding what you can and can’t deduct for business meals and entertainment can make a big difference during tax season. Stay informed and proactive to make the most of your eligible expenses.

Strategic Coordination of Sec. 179 Tax Deductions and Bonus Depreciation

Ken Botwinick, CPA | 03/26/2024

To optimize tax savings, businesses should prioritize maximizing depreciation write-offs for newly acquired assets within the current tax year. Two key federal tax incentives facilitate this strategy: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These provisions enable businesses to potentially deduct a significant portion or all of their qualifying asset costs in the first year of use. However, these deductions are subject to annual inflation adjustments and evolving tax laws that may phase out bonus depreciation.

Here’s how to strategically coordinate these deductions for optimal tax-saving outcomes:

Section 179 deduction overview:
Most tangible depreciable business assets qualify, including equipment, computer hardware, vehicles (with limitations), furniture, most software, and fixtures.
Depreciable real property generally does not qualify unless it meets the criteria for qualified improvement property (QIP).
For tax year 2024, the maximum Section 179 deduction is $1.22 million, with a phase-out beginning at $3.05 million in qualified asset additions.

Bonus depreciation overview:
Most tangible depreciable business assets, as well as software and QIP, generally qualify.
Used assets must be new to the taxpayer to be eligible.
For assets placed in service in 2024, the first-year bonus depreciation rate is 60%, reduced from 80% in 2023.

Comparison of Section 179 vs. bonus depreciation:
Section 179 deductions have generous rules but are subject to limitations such as phase-out thresholds, business taxable income constraints, and specific rules for certain types of assets and ownership structures.
First-year bonus depreciation deductions are not subject to complex limitations but are subject to declining percentage rates, with 60% applicable for assets placed in service in 2024.

Tax-saving strategy:
Maximize Section 179 deductions up to allowable limits.
Utilize first-year bonus depreciation for any remaining qualifying asset costs.
Example scenario:
In 2024, a calendar-tax-year C corporation places $500,000 of qualifying assets in service. Due to taxable income limitations, the corporation’s Section 179 deduction is capped at $300,000. The corporation can deduct $300,000 on its 2024 federal income tax return. Additionally, it can deduct 60% of the remaining $200,000 ($500,000 – $300,000) through first-year bonus depreciation, totaling a $420,000 deduction for the year.

Managing tax incentives:
Effective coordination of Section 179 and bonus depreciation deductions is crucial for maximizing tax benefits. We can provide detailed guidance on these strategies and address any specific queries you may have regarding tax rules and implications.

Protect The “Ordinary And Necessary” Advertising Expenses Of Your Business

Ken Botwinick, CPA | 03/06/2023

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.

However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

Reasonable advertising expenses that are directly related to the business activities.
An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep meticulous records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.