Prior to the change made by the 2017 Tax Act, taxpayers could deduct up to 50 percent of entertainment expenses if they were related to business activity (e.g., business discussions were held) and were not lavish. Similarly, prior law (Sec. 274(n)(1)) generally limited the deduction for food and beverage expenses to 50% of the amount that otherwise would have been deductible.
The 2017 Tax Act amended Section 274 of the Code to eliminate deduction of entertainment expenses, effective in 2018. The change, however, did not specifically address the deductibility of expenses for business meals, leaving some question about the deductibility of meals.
The IRS issued written guidance last week (Notice 2018-76) to clarify that taxpayers generally may continue to deduct 50% of the food and beverage expenses incurred in their trade or business. The guidance stated that Treasury Department and the IRS intend to publish proposed regulations clarifying when business meals are nondeductible entertainment expenses and when they are 50% deductible as business expenses. Until then, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Notice 2018-76 includes three examples to illustrate the application of this guidance. The examples highlight the need to have food and beverage expenses either paid separately from entertainment costs or on an invoice that separately states the costs of food and beverages.
- In Example 1, a taxpayer invites a business contact to a baseball game. The taxpayer purchases tickets for the game. While at the game, the taxpayer separately purchases hot dogs and drinks. Although the game tickets are not deductible, the hot dogs and drinks are deductible, subject to the 50% deduction disallowance.
- In Example 2, the taxpayer invites a business contact to attend a basketball game. The taxpayer buys tickets for seats in a suite, which includes food and beverages. The invoice for the tickets states that food and beverages are included in the ticket price. Because the invoice does not separately provide the cost for food and beverages, the entire cost of the ticket is nondeductible.
- Example 3 has the same facts as Example 2, except that the invoice for the suite tickets separately states the cost of food and beverages. Because the food and beverage amount is separately provided on the invoice, the cost of food and beverage is subject to a 50% deduction, while the entertainment portion is disallowed.
The IRS stated in the announcement that the entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
If you have questions about the 2017 Tax Act or any other tax-related question, please contact us.
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