IRS to issue proposed regs. on the deductibility of expenses for certain business meals

January 11, 2019

By Angela Spencer James, Kristine Mora, Christa Bierma, Debbie Spyker, and Debera Salam at The Tax Adviser on January 1, 2019

In Notice 2018-76, Treasury and the IRS announced their intent to issue proposed regulations on the deductibility of expenses for certain business meals. The notice also provides guidance taxpayers may rely on until the proposed regulations are effective.

Background

Sec. 274(a), as modified by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, disallows any otherwise allowed deduction from income tax for an activity or facility that constitutes entertainment, amusement, or recreation. Sec. 274(k) disallows a deduction for any food or beverages unless: (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or employee of the taxpayer) is present at the furnishing of the food or beverages. Sec. 274(n)(1) limits the deduction for any expense for food or beverages to no more than 50% of the expense that otherwise would be allowable.

The TCJA repealed the exception from Sec. 274(a) that preserved a deduction for business entertainment if it is directly related to or associated with the active conduct of business. This change effectively eliminates business entertainment deductions. Treasury regulations define "entertainment" using an objective standard, including activity "of a type generally considered to constitute entertainment," such as "entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, [and] sporting events." Under the regulations, entertainment may include activities that satisfy "personal, living, or family needs" but does not include: (1) supper money an employer provides to an employee working overtime; (2) a hotel room maintained by an employer for lodging of employees while traveling for business; or (3) an automobile used for business, even though it is also used for routine personal purposes, such as commuting to and from work.

Notice 2018-76

The notice clarifies that the TCJA did not change the definition of entertainment under Sec. 274(a)(1) and, therefore, the regulations defining entertainment continue to apply. In addition, the notice states that the TCJA did not address when the provision of food and beverages might constitute entertainment, observing that "the legislative history of the [TCJA] clarifies that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business."

According to the notice, Treasury and the IRS intend to issue proposed regulations to clarify when business meal expenses are nondeductible entertainment expenses and when those expenses are 50% deductible. Until those regulations are effective, however, taxpayers may rely on the guidance in the notice.

Under the notice, taxpayers may deduct 50% of an otherwise allowable meal expense if:

  1. The expense is an ordinary and necessary expense under Sec. 162(a) that is paid or incurred during the tax year in carrying on a trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer or the taxpayer's employee is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to current or potential business customers, clients, consultants, or similar business contacts; and
  5. The food and beverages (for food and beverages provided during or at an entertainment activity) are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the entertainment cost on one or more bills, invoices, or receipts.

To illustrate the appropriate deduction for a food and beverage expense incurred at an entertainment event, the notice provides three examples demonstrating the treatment of business meals in connection with an entertainment activity:

Example 1. Business meals purchased separately from entertainment: In the first example, Taxpayer A takes B, a business contact, to a baseball game. A purchases the tickets and separately buys hot dogs and drinks for A and B at the game. The notice provides that the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense. Accordingly, A may deduct 50% of the expense for the hot dogs and drinks.

Example 2. Cost for business meals commingled with entertainment, not separately stated or purchased: In the second example, Taxpayer C takes D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The ticket cost includes the costs of the food and beverages available in the suite, which are not separately stated on the invoice. The notice provides that the full cost is a nondeductible entertainment expense.

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