12 Oct How the IRS Final Rule on Entertainment and Meal Deductions May Impact Your Freelance Taxes
The major changes to entertainment and meal expense deductions brought about by the Tax Cuts and Jobs Act (TCJA) in 2017 may be a distant memory for many freelancers, but the IRS is still in the process of finalizing them, a move which may impact your tax obligations.
The original guidance under the TCJA essentially eliminated the deductions for entertainment expenses, but still allowed businesses to deduct expenses related to food and beverages within certain parameters. The final regulations reintroduce some limited deductions for entertainment, amusement and recreation activities. In addition, the IRS is providing additional information on what exactly constitutes an entertainment expense and the limitations on food and beverage expenses.
This guidance applies for expenses incurred after December 31, 2017 and, under the TCJA, if they are incurred and paid after Dec. 31, 2025, they will not be deductible at all.
These are the key clarifications from the final regulations issued by the IRS which may impact freelancers:
- Certain recreational activities for the benefit of employees, reimbursed expenses, and entertainment treated as compensation to an employee or includible in the gross income of a nonemployee as compensation for services or as a prize or award (and reported by the taxpayer as such) are still eligible entertainment expenses.
- The 50% limitation of deductibility of food or beverages still remains in the final guidelines along with the provision that these expenses must be reasonable and moderate (as opposed to being lavish and extravagant) and such refreshments should be served with the mindset of them being offered as part of an ordinary business expense.
- In addition, the taxpayer (i.e. you as a freelance business owner) or an employee of the taxpayer must be present when food or beverages are served.
- The TCJA also applied the 50% limitation on food or beverages to de minimisfringe employee benefits which formerly were not subject to it.
- You must separate deductible meal expenses from nondeductible entertainment expenses in order report and deduct them correctly from your taxes.
Another important point stated in the IRS final rule is that any food and/or beverages you deduct must be substantiated as being provided to “a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective. (i.e. You can’t dine alone to get the deduction). The above definition is also applied to employer-provided food or beverage expenses in the final rule which defines employees as being business associates if meals are provided at the same event to both employees and nonemployee business associates.
While the current pandemic situation may have curtailed some client entertaining and dining out this year, it is still important to abide by these final rules. As far as record keeping goes, keep your receipts in order so you have the documentation needed to reduce your tax bill as much as possible. Of course, this final rule applies not only to this tax year, but for any other tax years for which you may need to file your return late or amend your return from when this rule went into effect.