Tax Reform Beat-Up Entertainment

You can no longer receive a tax deduction for business entertainment and meal expenses, however, you get a 100% deduction on meals served at business presentations. 

Why is this?

Let’s consider a few examples:

Example 1. Hudson, a network marketer, invites clients and prospects to an educational mixer. He does a one-hour presentation and then serves dinner to the participants. He spends $3,000 on dinner. Hudson deducts 100% of that $3,000 cost as a presentation expense.

Example 2. Hailey, a real estate sales professional, holds an open house and serves wine and hors d’oeuvres. Her expenses for the wine and hors d’oeuvres are 100% deductible as presentation expenses. 

NERD LANGUAGE – Private Letter Ruling 9414040, the IRS quotes S.Rpt 99-313, which states: “… a wine merchant who permits potential customers to sample wine of the type that the merchant is offering for sale may deduct in full the cost of wine used as a sample, along with reasonable costs that are associated with the wine tasting (e.g., food that is provided with the wine to demonstrate the suitability of the wine for particular types of meals).” Basically, all you need to know is they left wine alone!

Example 3. Declan markets and sells real property to residents of Nevada near Las Vegas. He acts as a broker for the owners of the real estate and receives commissions based on his sales. 

To find his prospects, Declan uses telemarketing, online subscription service and holds a drawing for free trips to a Disney Cruise, conventions, and a UFC Fight at T Mobile arena in Las Vegas. Declan doesn’t engage in any other marketing. 

Let’s assume Declan provides dinner (free of charge) at the drawings, regardless of whether attendees purchase one of his listed properties. The attendees must stay for the presentation. Declan, nor his employees eat, as they’re busy presenting and engaging with the attendees. 

The IRS ruled that Declan’s dinners are not entertainment but 100% deductible presentation expenses. 

Example 4. The court ruled that James could deduct 100% of the food and drink he served during his presentation meetings at his home. The food and drink he served was considered part of the cost of his presentation rather than entertainment. 

James sold solar heating and cooling systems. He installed a unit in his home and he presented his unit to prospective purchasers during his presentation. Is this something you can do for your business? 

Example 5. IRS regulations state the cost of a fashion show is not en­tertainment when put on by a manufacturer of dresses for its prospective store buyers. On the other hand, the IRS notes that an appliance dis­tributor who conducts a fashion show for the spouses of his or her retailers incurs entertainment expenses.

Key Point—The Public

IRC Section 274(e)(7) exempts the presentation expense from classification as entertainment when it is an expense for goods, services, and/or facilities you make available to the general public.

To maintain the integrity of your 100% presentation deduction make sure your presentation is to the general public. 

Keep in mind, your personal family can be part of the general public but not exclusively. 

Takeaways

The key point of the business meal as a presentation expense is that you are doing this with a group of prospects that does not exclusively consist of your personal family. The tax code uses the term “general public” as the authorized group.