 Hello and welcome to this session in which we will discuss meals and entertainment. Those expenses are treated differently whether you are a self-employed individual or an employee. Just real quick if you're a self-employed individual you are going to prepare a schedule C and you're going to either have a net income or a net loss then you're going to prepare your 1040, your form 1040 and on your form 1040 you're going to arrive to adjusted gross income. Net income goes above adjusted gross income therefore meals and entertainment for business purposes are deducted for AGI. Now if you are an employee and you incurred meals and entertainment you will prepare schedule A and if you have any of those meals expenses you will deduct them on schedule A which are suspended from the year 2018 to 2025 then they are deducted from AGI or below the line so we need to understand at this point what is meals and entertainment and are they deductible and for how much once again for employees that's not available between 2018 and 2015. Let's go ahead and get started discussing entertainment. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures multiple choice questions true false questions as well as exercises. Go ahead start your free trial today. Starting with entertainment many businesses incurred costs related to entertainment and meals. What will be an example of this for example you might invite your customers well to golfing or to fishing or to a sports event or to a concert well that's a form of entertainment now why would you do that well because you want to kind of basically build goodwill to grow your business operation you want to either gain them as a customer or keep them as a customer by keeping them happy now there is a personal enjoyment for the business themselves as well for the owner of the business well if you're attending a sports event your favorite team well you're also enjoying the event okay so congress what they did they kind of they said well this rule is being abused so they made the decision to restrict the deduction associated with any entertainment expense therefore simply put entertainment expense is no longer applicable what about meals we'll talk about meals shortly so the following items are not eligible for deduction which is entertainment expenses any activities typically considered entertainment amusement or recreation no longer applicable membership dues for clubs organized for business pleasure recreation or social purposes not deductible and any facilities used in conjunction with these activities simply put entertainment expense out no longer deductible how about meals well sometime you might you might invite your customers or potential customers to a meal okay taxpayers are still permitted to deduct certain food and beverage expenses related to to the operation of their trade or business okay for example expenses incurred for business meals we're going to see what business meals are at the end what current or potential client as well as meal consumed by employee during work related travel and we talked about work related travel and a separate recording are 50% so what does that mean meals are deducted up to 50% now between 2021 and 2022 they had a special for 100% that's all that's gone now it's 50% what happens sometime is this you work for a company and the company will have its own cafeteria which called it's called eating facilities or sometime what happened you work for a company and as you are you know when you take your break your coffee break you might find bagels there or donuts or sometime pizza those are called the minimus fringe benefits simply put you can you know consume those or sometime fruit or vegetables you'll be able to consume those so can the company deduct deduct those expenses well expenses occur in a subsidized eating facility or the minimus fringe benefit applied to food and beverage provided to employees what does that mean it means from 2018 to 2025 the 50% limitation applied to those so when a company incurred those so when the company buys the bagel they can only deduct 50% of it and when they operate this facility 50% is deductible okay and guess what starting 2026 those deductions are eliminated the government is trying to do what raise more money let's take a look at an example senofi pastor provides an employee cafeteria within its premises catering to its staff member and my wife used to work there and they did have this cafeteria the cafeteria operate on a cost basis simply put it's only for employees and what they do is they pay the cost now why do they do this and actually actually I used to work with Merrill Lynch at some point and they had this also this cafeteria basically cost basis long time ago well guess what senofi pastor as a company will only be able to deduct 50% of the cost to operate this let's take a look at another example BLCO Bucknell Sicki and company the CPA firm where I used to work offer coffee and occasional donuts and bagels to its employee in the break room all the time and some and some employees I remember they hated it because they were trying to lose weight this provision qualify as the the minimum fringe benefit and it's not subject to taxation for the employees if you ate a bagel or or a or a donut you don't have to you know it's it does it's not included in your income it's just you know it's under the the minimum fringe benefits and we talked about those in a separate recording however when it comes to deducting the cost of this food Bucknell is only deducted only allowed to deduct 50% of the expense and guess what starting in 2026 those deductions are eliminated there are exceptions to the 50% rule in other words when you when you have a meal there are you can deduct 100% of it here are some the some of the exceptions if you include the meal compensate in the compensation of the employer independent contractor then it's fully deductible so if if they provide you with the meal and say okay we're gonna add you know 20 30 dollars to your to your pay guess what now you're responsible for that then that's fine then the company can deduct that as long as you're paying for it expenses directly associated with business meetings of employees if the employees are meeting for business purposes those are fully deductible employer paid recreational or social activities for employee like an annual holiday parties or spring picnics or holiday picnic those are fine for example what i used to work always on april 15 the last tax year we would go for a huge party that's one-time thing yes they can deduct 100% of that cost business hosting retreats or off-site training events you can deduct 100% of the meals provided to participants at those locations so those are these expenses are 100 these meals are 100% deducted let's take a look at this example mona earns an all-expense paid trip to europe as a reward for selling the highest insurance for her company john hancock her employer considered this trip as an extra form of compensation okay in this case she's gonna incur meals and entertainment that's fine the 50% rule does not affect why because it's a form of compensation they're paying her now when we say business meals what do we mean by business meals to qualify for a deduction when it comes to a business meal the amount has to be reasonable means it means it's not lavish too much or extravagant either the taxpayer or the employee must be present at the meal otherwise it's not deductible the food and the beverage must be provided to a current or potential customer or client doesn't have to be a current that at least a potential and if the meal is combined with entertainment for example you attended a sports event and you ordered some food the cost of the meal and the beverages should be separately itemized on the bill or a seat so they cannot combine both you want to make sure you want to keep the receipt the purpose of the event who was there so on and so forth to prove that to prove the for the IRS the expense for the IRS what should you do now go to far hat lectures and look at additional mcqs that's going to help you understand this topic good luck study hard whether you are a CPA exam candidate enrolled agent or accounting student invest in your career and stay safe