IRS Clarifies that Most Business Meals Still 50 Percent Deductible
On October 3, 2018, IRS issued Notice 2018-76, which was welcome news for many business owners. The Notice provides transitional guidance on the deductibility of business meal expenses in light of the Tax Cuts & Jobs Act's disallowance of deductions for entertainment expenses. Many were concerned that the disallowance would extend to many client (or potential client) business meals, but the Notice, which may be relied upon until proposed regulations are published, clarifies that most business meal expenses will continue to be 50 percent deductible, as long as a separate invoice is issued for the food.
The TCJA repealed the "directly related" and "business discussion" exceptions to the general prohibition on deducting entertainment expenses in § 274(a)(1)(A). Thus, beginning in 2018, entertainment expenses are no longer deductible. It was unclear whether business meals involving a client or potential client fell into the entertainment category and thus were swept into the disallowance. Today’s Notice alleviates that concern.
Citing legislative history, the Notice states that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business. Until proposed regulations are effective, the Notice states that taxpayers may rely on the guidance for the treatment under IRC § 274 of expenses for certain business meals. In other words, taxpayers may deduct 50 percent 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
The Notice then includes several examples, including the following:Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B. Result: The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
IRS is requesting comments for future guidance to further clarify the treatment of business meal expenses and entertainment expenses under IRC § 274.
We will keep you posted.
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