“It used to be the three-martini lunch. Well now, it’s the 2.4-martini lunch,” says D. Bryan Davis, a certified public accountant with Fish & Davis, P.C. That’s how many accountants are summing up the effect the new “simplified” tax law will have on deductions for business meals and entertainment. Beginning in 1987, you can only deduct 80 percent of the cost.
Under the old law, taxpayers could deduct the entire cost of a meal even if they didn’t talk about business. “Under the new law, you have to discuss business for the meal to be deductible,” Davis says.
So, just how does the IRS plan to enforce this change? Just as it enforced the old law: through the audit process. Taxpayers are expected to save receipts and notes that would indicate what business was discussed during the meal and produce those receipts in the event of an audit.
Another change in the law applies to meals that are “lavish and extravagant.” Davis says the IRS expects taxpayers to subtract the part of a meal that they consider lavish and extravagant before they figure their 80 percent deduction. And that could get pretty subjective. “It’s going to be interesting to see how the IRS defines extravagant,” Davis says. “Is everything other than McDonald’s going to be labeled extravagant?”
In the meantime, before the IRS comes up with a definition for extravagance, many accountants suggest that taxpayers claim their 80 percent deduction based on the entire cost of meals and let the IRS do the figuring.
Obviously, business people in sales who use meals to butter up clients are going to be hurt by this change. But even those taxpayers who are reimbursed by their employer for their expenses may someday be affected. A company that reimburses employees for the full cost of business meals can now deduct only 80 percent of the reimbursement, so don’t be surprised if your company decides to change its policy on expense reimbursement. -Sally Giddens