IRS Issues Transitional Guidance on Business Meals
As with many other provisions contained in the Tax Cuts and Jobs Act of 2017 (“the Act”), the deductibility of certain business meals has been an issue that taxpayers have been hoping the IRS would clarify. On October 3rd, the IRS released Notice 2018-76, which contained transitional guidance on the deductibility of business meals. The Act modified §274 of the Internal Revenue Code to disallow any deductions for expenses related to entertainment, amusement, or recreation. As noted by the IRS in Notice 2018-76, the Act failed to specifically address the deductibility of expenses for business meals.
Prior to the release of the Act, taxpayers were only allowed to deduct expenses for activities that may be considered entertainment, amusement, or recreation if the expense met one of the two exceptions. Under the first exception, entertainment expenses that were directly related to the active conduct of a taxpayer’s trade or business would be deductible. The other exception was for expenses related to activities that directly preceded or followed a business discussion, which could then be considered as part of the active conduct of the taxpayer’s trade or business. The deduction allowed prior to enactment of the Act was limited to 50% of qualified entertainment and food and beverage expenses. The Act removed the directly related and business discussion exceptions, rendering entertainment expenses nondeductible under the revised §274.
Meal expenses retained the 50% limitation that existed prior to the Act, but there was no guidance specifically addressing business meals. Until now. On Wednesday, the IRS issued interim guidance through Notice 2018-76 to clarify the deductibility of these expenses.
The Notice states that business meals may be eligible for the 50% deduction 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 other 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
The IRS also provided three examples in the Notice to demonstrate how these rules may be applied.
In the first example, Taxpayer A invites B, a business contact, to a baseball game. A separately purchases tickets for A and B for the game. While at the game, A purchases food and drinks for A and B. In this example, the cost of the tickets for the game are considered to be entertainment expenses and not deductible. The cost of the food and beverages, which were purchased separately, would be allowed subject to the 50% limitation.
The second example is similar to the first, except in this scenario the tickets are to attend the game in a suite which provides food and beverages. The cost of food and beverages are not purchased separately from the tickets and not separately stated on the invoice. As in example one, the tickets represent a nondeductible entertainment expense. Unlike example one, the food and beverage expenses are not broken out separately and will be nondeductible as a component of the entertainment expense.
The third example uses the same facts as example two, except that the invoice for the game tickets separately states the cost of the food and beverages. As in the previous examples the cost associated with the tickets remains nondeductible as an entertainment expense. However, the cost of food and beverages would be deductible under the 50% limitation since they are stated separately on the invoice.
The Notice also states that the Treasury Department and the IRS have asked for comments on related issues and intend to publish proposed regulations under §274, which will contain further guidance. Until that time, taxpayers may rely on this much welcomed transition guidance provided by the Notice.
If you have any questions regarding the Notice, or any other provisions of the Tax Cuts and Jobs Act, please contact us.