By Pension and Benefits Editorial Staff
The IRS has provided transitional guidance on the deductibility of expenses for certain business meals under Code Sec. 274, which was amended by the Tax Cuts and Jobs Act (P.L. 115-97). The guidance indicates that 50 percent of the cost of food and beverages provided during or at entertainment events is deductible if purchased separately from the entertainment or the cost is stated separately from the cost of the entertainment.
Although the TCJA eliminated business deductions for expenses related to entertainment, amusement, and recreation activities, no change was made to the rule allowing a deduction for 50 percent of business meal expenses. Some uncertainty exists regarding the treatment of meal expenses provided in connection with entertainment under the new law. The changes made by the TCJA are effective for amounts paid or incurred after 2017.
Prior law. Prior to amendment by the TCJA, Code Sec. 274(a)(1)(A) generally prohibited a deduction with respect to an activity of a type considered to constitute entertainment, amusement, or recreation (“entertainment expenses”). However, Code Sec. 274(a)(1)(A) provided exceptions to that prohibition if the taxpayer established that: (1) the item was directly related to the active conduct of the taxpayer’s trade or business (the “directly related” exception), or (2) in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that the item was associated with the active conduct of the taxpayer’s trade or business (the “business discussion” exception).
Also prior to amendment by the TCJA, Code Sec. 274(n)(1) generally limited the deduction of food and beverage (meal) expenses and entertainment expenses to 50 percent of the amount that otherwise would have been allowable. Thus, under prior law, taxpayers could deduct 50 percent of meal expenses and could deduct 50 percent of entertainment expenses that met the directly related or business discussion exceptions.
Law changes. The TCJA repealed the directly related and business discussion exceptions to the general prohibition on deducting entertainment expenses. Thus, entertainment expenses are no longer deductible. The TCJA also amended the 50 percent limitation to remove the reference to entertainment expenses. Otherwise allowable meal expenses remain deductible, subject to the 50 percent limitation.
Interim guidance for business meals. Under the guidance, 50 percent of food and beverage expenses associated with operating a trade or business continue to be deductible after 2017 if they meet the following requirements:
- The expense must be ordinary and necessary and paid in carrying on a trade or business;
- The expense may not be lavish or extravagant;
- The taxpayer or an employee must be present when the food or beverages are furnished;
- Food and beverages must be 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.
Proposed regulations. The IRS notice indicates the Treasury Department and the IRS intend to publish proposed regulations under Code Sec. 274, which will include guidance on the deductibility of expenses for certain business meals. Until the proposed regulations are effective, the guidance in the notice may be relied upon for the treatment under Code Sec. 274 of expenses for certain business meals.
The IRS asks for comments on the proposed regulations by December 2, 2018, including whether:
- further guidance is needed to clarify the treatment of entertainment and business meal expenses;
- the definition of entertainment in the current regulations should be retained or revised;
- the objective test in the current regulations for determining whether an activity constitutes entertainment should be retained or revised; and
- additional examples should be added to the proposals.
Send comments by mail to the Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2018-76), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be made electronically to [email protected], with “Notice 2018-76” in the subject line.
SOURCE: Notice 2018-76, I.R.B 2018-42 on October 15, 2018.
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