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Proposed regulations have been released by the IRS concerning the deductibility of meals and entertainment expenses in tax years beginning after December 31, 2017. These proposed regs clear up lingering confusion regarding whether meals are considered entertainment, making them generally nondeductible.
Tax Reform Rule Changes
Before the Tax Cuts and Jobs Act (TCJA), Section 274 of the Internal Revenue Code generally prohibited deductions for expenses related to entertainment, amusement or recreation (commonly referred to as “entertainment” expenses). The tax code did grant exceptions for entertainment expenses “directly related to” or “associated with” actively conducting business. Businesses generally could deduct 50% of such expenses.
The tax code also limited deductions for food and beverage expenses that satisfied one of these exceptions. A deduction was permitted only if:
The TCJA amended Sec. 274 to generally prohibit deductions for any expenses related to entertainment, regardless of whether they are directly related to or associated with conducting business. Some taxpayers wondered if the amendment also banned deductions for business meal expenses.
The IRS responded to this question in the fall of 2018 with Notice 2018-76. The notice listed several circumstances under which businesses could continue to treat business meal expenses, including meals consumed by employees on work travel, as 50% deductible expenses until the IRS published its proposed regs explaining when business meal expenses are nondeductible entertainment expenses.
Applicability of the Proposed Regs
The proposed regs provide that the deduction limitation rules generally apply to all food and beverages, whether characterized as meals, snacks or other types of food or beverage items. The deduction limitations apply even to food and beverages treated as de minimis fringe benefits.
The proposed regs define food or beverage expenses as the cost of food or beverages, including any delivery fees, tips and sales tax. But the deductible expenses for employer-provided meals at an eating facility do not include operating expenses for the facility (for example, the salaries of employees preparing and serving meals and other overhead costs).
Food and Beverages at Entertainment Activities
Food or beverages provided during or at an entertainment activity are not considered nondeductible entertainment expenses under the proposed regs as long as they are purchased separately from the entertainment or their cost is stated separately from the entertainment cost on a bill, invoice or receipt. For example, let’s say you take a client to a football game. You buy some food at the game and pay for it separately from the game tickets. The amount may qualify for a deduction if you meet other certain requirements.
The 2018 notice provided that taxpayers could not circumvent this entertainment disallowance rule by inflating the amount charged for food and beverages. The proposed regs tackle this issue by requiring that the amount charged for food or beverages reflect the venue’s usual selling cost for those items if purchased separately from the entertainment or the reasonable value of the items.
Business Meal Expenses
The proposed regs generally follow the lead of the 2018 guidance on the deductibility of business meal expenses but also incorporate other statutory requirements taxpayers must meet to deduct 50% of the expense. Businesses may deduct 50% of business meal expenses if:
The proposed regs also clarify the requirement in Notice 2018-76 that the food and beverages be provided to a “business contact.” The notice described such an individual as a current or potential business customer, client, consultant, or similar business contact.
The proposed regs use the term “business associate,” defined as a person the taxpayer could reasonably expect to engage with in business dealings, including a current or prospective customer, client, supplier, employee, agent, partner, or professional advisor. The inclusion of employees makes the standard applicable to employer-provided meals and situations where a business provides meals to both employees and nonemployee business associates at the same event.
Travel Meal Expenses
Although the TCJA did not explicitly change the rules for travel expenses, the proposed regs are intended to provide comprehensive rules for food and beverage expenses. As a result, they apply the general rules for meal expenses to travel meals.
The proposed regs also incorporate statutory substantiation requirements for travel meal expenses — evidence of the amount, time and place, and business purpose of the meal. Also, meal expenses for spouses, dependents or other individuals accompanying the taxpayer (or an employee of the taxpayer) on business travel generally are not deductible unless the individual is an employee of the taxpayer and traveling for a business purpose.
Other Food and Beverage Expenses
In addition, the proposed regs provide that business meal expenses and 50% deduction limits do not apply to expenses that fall within one of the following exceptions:
These expenses all are fully deductible.
Final regs are on the way
Comments on the proposed regs must be submitted by April 13, 2020, and a public hearing may be held. In the meantime, you can rely on the proposed regs as well as the guidance in Notice 2018-76 until the IRS issues final regs. Please contact a member of your DGC client service team or Stephen Minson, CPA, MST at 781-937-5120 / email@example.com if you have specific questions about meals and entertainment deductions.
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