On October 3, 2018, the IRS issued Notice 2018-76, Expenses for Business Meals Under § 274 of the Internal Revenue Code, stating its intent to publish proposed regulations under Internal Revenue Code Section 274, which was modified by the Tax Cuts and Jobs Act (TCJA). The notice also contains transitional guidance regarding the treatment of amounts paid or incurred for certain business meals under §274. Taxpayers may rely on this guidance until the proposed regulations are released and effective.
The TCJA’s elimination of the deduction for amounts paid or incurred for entertainment after December 31, 2017, raised concern as it seemed the general 50 percent deduction for the cost of certain food and beverage expenses, associated with the operation of a taxpayer’s trade or business, was inadvertently eliminated. Regarding congressional intent to allow taxpayers to continue deducting these amounts—as indicated in the legislative history of the TCJA—the notice clarifies taxpayers may deduct 50 percent of an otherwise allowable business meal expense if all of the following conditions are met:
- The expense is considered ordinary and necessary under §162(a) and is paid or incurred by the taxpayer during the taxable year while carrying on a trade or business
- The expense isn’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 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 is stated separately from the cost of the entertainment on one or more bills, invoices or receipts
The notice strongly emphasizes the entertainment disallowance rule may not be circumvented by inflating the amount charged for food and beverages. In addition, the IRS provides a set of examples to elaborate on the final condition for business meal deductibility. The second example, which assumes conditions one and two are met, illustrates this final condition:
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 as defined in § 1.274-2(b)(1)(i) 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 the § 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.
If the invoice for the basketball game included an itemized listing of food and beverage costs, Taxpayer C may be able to deduct 50 percent of those expenses. The remaining cost of the basketball game tickets would be nondeductible after the TCJA.
To meet the notice’s requirement to track the amounts paid or incurred for food or beverages separately from the cost of entertainment, consider creating or updating your accounting and reporting procedures to separately capture these amounts. See our BKD Thoughtware® article for best practices for reporting this information.
If you’re having trouble navigating the new meals and entertainment rules under the TCJA, our step-by-step expense assessment can help. For more information, contact Julia or your trusted BKD advisor.