IRS Issues Guidance for Business Meals and Entertainment

March 2, 2020 | Kristine Tidgren

On February 24, 2020, IRS issued proposed regulations, REG-100814-19, to address the deductibility of food and beverage expenses in light of the disallowance of entertainment expenses under IRC § 274(a)(1)(A) by the Tax Cuts & Jobs Act (TCJA). The new guidance largely tracks the transitional guidance issued in Notice 2018-76, but adds clarity with respect to several issues.

Background

Section 274(a)(1)(A) generally disallows a deduction for activities constituting entertainment, amusement, or recreation. However, prior to the TCJA, section 274(a)(1)(A) allowed a deduction for entertainment expenses if the taxpayer established that: (1) the item was directly related to the active conduct of the taxpayer’s trade or business (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), the item was associated with the active conduct of the taxpayer’s trade or business (business discussion exception).  Section 274(n)(1) generally limited the deduction for food or beverage expenses and entertainment expenditures to 50 percent. Distinguishing between meal and entertainment expenses was unnecessary for purposes of the 50 percent limitation.

The TCJA repealed the directly related and business discussion exceptions to the general prohibition on deducting entertainment expenditures in section 274(a)(1)(A). This eliminated the deduction for all entertainment expenses, unless one of nine exceptions in section 274(e) applies. IRS has confirmed in the proposed regulations that Congress did not change the general law for deducting business meals when it eliminated the deduction for entertainment expenses. The TCJA did, however, limit the deduction for meals for the convenience of employers and  “de minimis” food and beverages to 50 percent.

General Requirements for Deducting Business Meals

The proposed regulations generally apply the guidance in Notice 2018–76 to all food or beverages, including travel meals, employer-provided meals, and meals provided at or during an entertainment activity. The proposed regulations confirm that 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 “business associate”; 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 proposed regulations follow the definition of “business associate” as currently provided in §1.274-2(b)(2)(iii).  Thus, to qualify as a deductible business meal, food or beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”  The proposed regulations apply this standard to the deduction of food or beverage expenses generally. 

Meals During an Entertainment Event

As explained by Notice 2018-76, the proposed regulations confirm that taxpayers may deduct 50 percent of an otherwise allowable business expense if the food and beverages are (1) purchased separately from the entertainment or (2) if the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. Taxpayers may not circumvent the rule by inflating the amount charged for food and beverages. The proposed regulations clarify that the amount charged for food or beverages on a bill, invoice, or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment, or must approximate the reasonable value of those items.

Summary of Examples

The proposed regulations include a number of examples explaining the deductibility of food and beverages under different circumstances, including the TCJA’s 50 percent limit to the deduction for food and beverages provided as a de minimis fringe benefit.  The following table summarizes several common fact patterns presented in the examples.