Chew on This: Meals and Entertainment Expenses
Posted Aug 26, 2019
IRS Notice 2018-76 clarifies the new rules around food and beverage deductions under the Tax Cuts and Jobs Act (TCJA). The TCJA eliminated the traditional 50% deduction for business meals and entertainment, effective in 2018. Therefore, businesses can no longer deduct the cost of expenses relating to entertainment, such as the cost of sporting or concert tickets following a substantial business discussion. Entertainment includes any activity constituting amusement or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips. However, the TCJA generally retained the deductibility of food and beverage expenses.
Under interim guidance provided in Notice 2018-76, the IRS states that a 50% deduction continues to be allowed for food and beverage expenses if the following conditions are met:
- The expense is an ordinary and necessary business expense under Section 162(a) paid or incurred during the tax year when carrying on any trade or business;
- The expense isn’t lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they 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.
Notice 2018-76 contains three examples illustrating how the IRS intends to interpret these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the game.
Example 1: Taxpayer A takes a customer to a baseball game and buy the hot dogs and drinks. The tickets are nondeductible entertainment, but Taxpayer A can deduct 50% of the cost of the hot dogs and drinks purchased separately.
Example 2: Taxpayer B takes a customer to a basketball game in a luxury suite. During the game, they have access to food and beverages, which are included in the cost of the tickets. Both the cost of the tickets and the food and beverages are nondeductible entertainment.
Example 3: The facts involving Taxpayer C are the same as they are for Taxpayer B, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. As a result, Taxpayer C can deduct 50% of the cost of the food and beverages.
If you have further questions about the new meals and entertainment expense rules, we will be happy to schedule a consultation with you. Please call our office at 828-324-1661.
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