Updated IRS Guidance on Entertainment Meal Deductions

In relation to our first blog, “Understanding the New Rules Regarding Business Entertainment Deductions,” the IRS has since issued a notice with updated guidance on the expenses deductibility of meals purchased for entertainment purposes. The IRS intends to publish the proposed regulations and is allowing taxpayers to rely on the guidance in the notice until they are effective.

Code Sec. 162(a) - allows deductions for ordinary expenses paid in the tax year concerning any business.

The Tax Cuts and Jobs Act (TCJA) amended Code Sec. 274(a)(1)(A) to generally prohibit deductions relating to amusement, entertainment, or recreation.

Code Sec. 274

• (k) – states no deduction is allowed for expenses on food or drink unless the expense is not excessive considering the situation, and the taxpayer (or one of their employees) is present for the purchase.
• (n) – states that the deduction on a food and drink expense must be 50% or under the expense amount.
• (e) – provides exceptions to Code Sec. 274(a) and states that expenses under these exceptions could be limited to a 50% deductible under 274 (n).

There was no exact clarification on what constitutes “entertainment,” however, due to past TCJA legislation, taxpayers can assume a 50% deduction on food and drink expenses concerning business operations.

As stated by the Notice, taxpayers may deduct 50% of business meal expenses if:

1. The expense is ordinary and paid in the tax year on any business
2. Under provided circumstances, the expense is not extravagant
3. The taxpayer (or one of their employees) is present for the purchase
4. The meal is provided to current or potential customers, clients, or referrals
5. Food and drink provided for entertainment activities are purchased separately from the entertainment purchase (on separate bills).

Examples:

1. A taxpayer invites a business contact to a hockey game. The taxpayer purchases suite tickets for himself and his business contact where there is food available to them. The taxpayer separately purchases popcorn and sodas for him and his business contact to enjoy during the game. The tickets are considered an entertainment expense and not deductible. Because the tickets and food were purchased separately, the food is deductible but subject to the 50% disallowance.

2. A taxpayer invites a business contact to a hockey game. The taxpayer purchases suite tickets for himself and his business contact where there is food available to them. On the taxpayer’s invoice, the food is included in the ticket purchase. Because the tickets and food were not purchased separately or stated separately on the bill, they are both considered entertainment and are not allowed for a deduction on the expense.

3. Assume the same scenario in example two, but the invoice separately states the price of the tickets and the food. The tickets are still considered entertainment and are therefore not allowed a deduction. However, because the bill separately states the prices of tickets and food, the food expense is allowed up to a 50% deduction.

The IRS is working to provide clarification on the guidance for these rules. While in process, please refer to this notice for general guidelines. If you have any questions, please contact us or your Lutz representative.