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IRS guidance on the deductibility of meals purchased in an entertainment context

Posted by Admin Posted on Oct 04 2018

In a Notice and accompanying information release, IRS has provided transitional guidance on the deductibility of expenses for business meals that are purchased in an entertainment context.

The Tax Cuts and Jobs Act did not address the circumstances in which the provision of food and beverages might constitute entertainment. However, the legislative history of the Tax Cuts and Jobs Act clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.

The Notice provides that taxpayers may deduct 50% of an otherwise allowable business meal expense if:

1. The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;

2. The expense is not lavish or extravagant under the circumstances;

3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;

4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and

5. 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.

Example 1. Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

The baseball game is entertainment and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to disallowance.

Therefore, A may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2. Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

The basketball game is entertainment and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to disallowance.

Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3. Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

As in Example 2, the basketball game is entertainment and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to disallowance.

Therefore, C may deduct 50% of the expenses associated with the food and beverages provided at the game.

Additional future guidance.

IRS intends to publish proposed regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance for the business meals described in the Notice.

IRS intends to issue separate guidance addressing the treatment of expenses for food and beverages furnished primarily to employees on the employer's business premises.