LUTZ BUSINESS INSIGHTS
Updated IRS Guidance on Entertainment Meal Deductions
STEVE KENNEY, TAX SHAREHOLDER
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.
Before the Tax Cuts and Jobs Act (TCJA), Code Sec. 274(a)(1)(A) generally prohibited deductions for entertainment expenses which were usually considered activities relating to amusement, entertainment, or recreation. The TCJA amendment to this rule removed all exceptions.
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:
- The expense is ordinary and paid in the tax year on any business
- Under provided circumstances, the expense is not extravagant
- The taxpayer (or one of their employees) is present for the purchase
- The meal is provided to current or potential customers, clients, or referrals
- Food and drink provided for entertainment activities are purchased separately from the entertainment purchase (on separate bills).
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 purchases popcorn and sodas for him and his business contact to enjoy during the game. Because the tickets and food were purchased separately, the entertainment expense is not subject to disallowance (meaning up to 50% deduction on the meal expense).
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.
ABOUT THE AUTHOR
STEVE KENNEY + TAX SHAREHOLDER
Steve Kenney is a Tax Shareholder at Lutz with over 20 years of experience in taxation. He specializes in executive tax, estate, and family wealth planning, and assists with mergers and acquisitions.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Insititute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Omaha Estate Planning Council, Board Member
- Certified Public Accountant
- Chartered Advisor in Philanthropy
- BSBA in Finance and Accounting, Creighton University, Omaha, NE
- Children's Scholarship Fund of Omaha, Board Member, Finance Chairman
- Creighton Preparatory School, Finance Committee
- Creighton University Heider College of Business, Advisory Board
- Duchesne Academy of the Sacred Heart, Board of Trustees
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