Following up on passage of the Tax Cuts & Jobs Act last December, the IRS has issued guidance that confirms businesses can generally continue to deduct 50 percent of the cost of business meals, including those incurred while meeting with or entertaining customers and clients. However, the cost of the entertainment itself can no longer be deducted for 2018 and beyond, even when business discussions are conducted.
With the law’s disallowance of the client entertainment deduction, it was unclear if all meals with customers, clients and vendors would be considered “entertainment.” Treatment as “entertainment” would drop the tax deduction from 50 percent to zero under the new law.
Notice 2018-76 provides interim guidance clarifying that while tax reform amended the tax code to generally disallow expenses for entertainment, amusement, or recreation, it did not change the 50-percent deductibility of business meals. The IRS intends to publish proposed regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50-percent deductible expenses. Until the proposed regulations are effective, taxpayers may deduct, under the guidance provided in Notice 2018-76, an otherwise allowable business meal expense if the following conditions are met:
– The expense is an ordinary and necessary expense 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.
– 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 provides several examples of how the guidance will be applied. In one such example, a taxpayer who attends a baseball game with a business contact may deduct 50 percent of the cost of hot dogs and drinks purchased at the baseball game. The cost of the tickets to the game itself, an entertainment event, is nondeductible. In another, a taxpayer purchases tickets to attend a professional sporting event in a suite with a business contact at which food and beverages are available. The taxpayer would treat the food and beverages as nondeductible if they are included in the cost of the suite ticket, but would be able to deduct 50 percent of the cost of the food and beverages if it was separately stated from the cost of the event tickets on the suite invoice.
Other important notes pursuant to the IRS guidance:
1) Typical “quiet business meals” with clients or customers remain 50-percent deductible.
2) The cost of food at an entertainment venue is 50-percent deductible as long as it is separately billed and not included in the price charged for the entertainment. For example, if you take a customer to a basketball game, you can deduct 50 percent of the cost of dinner no matter if you dined at a restaurant outside the arena or purchased food from a concession after arriving at the game.
3) Meals for employees on business travel remain at 50-percent deductible
4) Meals provided to employees for the employer’s convenience are now 50-percent deductible; previously they were 100-percent deductible.
5) Office parties and picnics remain 100-percent deductible.
6) Employees with business meal expenses that are not reimbursed by the employer can no longer claim them as a miscellaneous itemized deductions on their personal income tax returns.
In light of the new guidance, taxpayers should review their payments classified as nondeductible entertainment and change supportable food and beverage charges to 50-percent deductible. The procedures for tracking and documenting entertainment, food and beverages should be revisited in order to distinguish between 100 percent, 50 percent, and non-deductible amounts. Taxpayers should also request that vendors separately state the charge for food and beverages to ensure that they are eligible for the business meal deduction.
If you have any questions regarding this update or any other tax matters, please consult a member or our tax team.