The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) brought about many changes to tax deductions, including the deductibility of business meals and entertainment expenses under Internal Revenue Code (IRC) §274. On Oct. 3, 2018, the IRS issued Notice 2018-76, which provides transitional guidance clarifying these changes and announces the intent to publish proposed regulations on this topic in the future.
Under pre-TCJA law, a taxpayer could generally deduct 50 percent of food and beverage expenses, provided such meals met certain criteria as outlined in IRC §274(k). Under the general rule outlined in IRC §274(a) (1), taxpayers could not deduct entertainment expenses (i.e., any activity “considered to constitute entertainment, amusement or recreation,” such as going to a theater, country club or sporting event). However, two exceptions existed under prior law that allowed taxpayers to deduct certain entertainment expenses:
- “Directly Related” Exception: The expense was directly related to the active conduct of the taxpayer’s trade or business.
- “Business Discussion” Exception: The expense directly preceded or followed a substantial business discussion associated with conducting business. If a taxpayer’s entertainment expenses met one of the above exceptions, the taxpayer was entitled to a deduction for 50 percent of such entertainment expenses.
TCJA repealed the “directly related” and “business discussion” exceptions, thus disallowing the deduction for all entertainment expenses. Taxpayers may still deduct meal expenses, subject to the 50 percent limit, as long as such expenses meet five criteria, outlined in the Notice:
- Expense is ordinary and necessary under IRC §162 and is paid or incurred during the taxable year in carrying on any trade or business
- Expense is not lavish or extravagant under the circumstances
- Taxpayer (or employee of the taxpayer) is present at the furnishing of the food or beverages
- Food or beverages are provided to a current or potential business customer, client, consultant or similar business contact
- Food and beverages are purchased separately from any entertainment activity or the costs of such food and beverages are stated separately from the cost of any entertainment activity on bills, invoices or receipts.
Notice 2018-76 includes several examples outlining implementation of this guidance. In one such example, the taxpayer invites a business contact to a baseball game, buys the tickets to the game and separately buys hot dogs and sodas for herself and the business contact. In this example, the taxpayer may deduct 50 percent of the cost of food and drinks (considered a meal) but may not deduct the cost of the tickets (considered entertainment).
The IRS requested comments on what additional guidance is needed for the treatment of entertainment and business meal expenses. This clarification, as well as confirmation of the guidance outlined in Notice 2018-76, is expected in the forthcoming proposed regulations. Dixon Hughes Goodman will continue to monitor these developments and how they may impact your business. For more examples on the deductibility of meals, entertainment and similar expenses, see our quick reference guide published here.