The IRS recently clarified that the business meal deduction remains allowable in certain circumstances under the Tax Cuts and Jobs Act “TCJA.” As a taxpayer, you can generally continue to deduct 50% of food and beverage expenses if they are related to operating your trade or business. This exclusive Tax Alert provides specialized guidance on how your businesses can effectively claim the deduction.
The New Guidance
Previously, the Internal Revenue Code (the “Code”) generally prohibited deductions for expenses related to entertainment, amusement or recreation. These were commonly referred to as entertainment expenses. However, the Code provided exceptions for entertainment expenses “directly related to” or “associated with” conducting business. At the same time, the Code further limited deductions for food and beverage expenses that satisfied one of the exceptions.
A deduction – limited to 50% of the amount of the expense – was allowed only if:
- The expense wasn’t lavish or extravagant under the circumstances, and
- The taxpayer, or an employee of the taxpayer, was present when the food or beverages were furnished.
The TCJA amends the Code to disallow all deductions for expenses related to “entertainment,” regardless of whether they’re directly related to or associated with conducting business. Some taxpayers interpreted the amendment as banning deductions for business meal expenses, including such expenses under the rubric “entertainment expenses.”
According to the new guidance, the TCJA doesn’t address the circumstances under which providing food and beverages might constitute nondeductible entertainment. Legislative history “clarifies that taxpayers may generally continue to deduct 50% of food and beverage expenses associated with operating their trade or business.”
Until the IRS publishes its proposed regulations explaining when business meal expenses are nondeductible entertainment expenses, and when they’re 50% deductible expenses, businesses can assume that a 50% deduction is permissible when:
- The expenses are ordinary and necessary expenditures paid or incurred to carry on business,
- The expenses aren’t 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 current or potential customers, clients, consultants or similar business contacts, and
- For food and beverages provided during or at an entertainment activity, the entertainment is purchased separately from the food and beverages, 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 IRS recognizing that this fifth criterion could cause some confusion, provided illustrative examples, as follows:
In the first example, a taxpayer invites a business contact to a baseball game, paying for both tickets. While at the game, the taxpayer also pays for hot dogs and drinks. The game is entertainment, so the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and drinks, purchased separately from the tickets, isn’t an entertainment expense. Therefore, the taxpayer can deduct 50% of the cost as a meal expense.
The second example employs a similar scenario, with the taxpayer inviting a contact to a basketball game. This time, though, the taxpayer buys tickets to watch the game from a suite, with access to food and beverages included. The game again represents entertainment, and the cost of the tickets is nondeductible. The cost of the food and beverages isn’t stated separately on the invoice, rendering it a disallowed entertainment expense as well.
The final example uses the scenario above, except that the cost of the food and beverages is stated separately on the invoice for the basketball game tickets. The cost of the tickets remains nondeductible, but the taxpayer can deduct 50% of the cost of the food and beverages.
The TCJA doesn’t change the definition of “entertainment.” Under the applicable regulations, the term continues to include, for example, entertaining at:
• Night clubs,
• Cocktail lounges,
• Country clubs,
• Golf and athletic clubs, and
• Sporting events.
Entertainment also includes hunting, fishing, vacation and similar trips. It may include providing food and beverages, a hotel suite or an automobile to a customer or the customer’s family.
Be aware that the taxpayer’s business determines if an activity qualifies as is entertainment. For example, a ticket to a play would normally be deemed entertainment. However, the taxpayer is a theater critic it wouldn’t. Similarly, a fashion show wouldn’t be considered entertainment if conducted by an apparel manufacturer to introduce its new clothing line to a group of store buyers.
If you have questions on how this guidance may affect you and your business as well as the record keeping required to substantiate a business meal deduction, please contact your Friedman LLP tax professional.