SUMMARY
Welcomed guidance has been issued by the IRS that confirms businesses can generally continue to deduct 50 percent of the cost of business meals, including those incurred while meeting with or entertaining customers and clients. However, pursuant to changes made by tax reform, the cost of the entertainment itself can no longer be deducted for 2018 and beyond even when business discussions are conducted.
MEALS VS. MEALS AND ENTERTAINMENT
The IRS intends to publish proposed regulations under Section 274 clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50-percent deductible expenses. Until the proposed regulations are effective, under the guidance of the IRS, taxpayers may deduct a business meal expense if:
The expense is an ordinary and necessary expense under Section 162(a) paid or incurred during the taxable year in carrying on any trade or business
The expense is not 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 of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment dis-allowance rule may not be circumvented through inflating the amount charged for food and beverages.
EXAMPLE 1:
A taxpayer who attends a baseball game with a business contact may deduct 50 percent of the cost of hot dogs and drinks purchased at the baseball game. The cost of the tickets to the game itself, an entertainment event, is nondeductible.
EXAMPLE 2:
A taxpayer purchases tickets to attend a professional sporting event in a suite with a business contact at which food and beverages are available. The taxpayer would treat the food and beverages as nondeductible if they are included in the cost of the suite ticket, but would be able to deduct 50 percent of the cost of the food and beverages if it was separately stated from the cost of the event tickets on the suite invoice.
Taxpayers may rely on the interim guidance while the Treasury Department and IRS draft proposed regulations under Section 274.
EMPLOYEE MEALS
Clarity has also been offered regarding employer provided meals and snacks. Under prior law, the value of employer-provided snacks and beverages was 100% deductible to an employer. Upon enactment of the Tax Cuts and Jobs Act, certain employer-provided meals are only 50% deductible from 2018 through 2025. These include the following:
Meals provided for the convenience of the employer, on the employer’s premises
Office snacks, water, and coffee
Meals provided as part of a package involving a charitable sport ticket
This means the next time pizzas are ordered for employees working overtime—barring any changes from Congress—taxpayers will no longer be able to take the full deduction. Additionally, without further action by Congress, those meals will become fully nondeductible after 2025.
GUIDANCE AT A GLANCE
This guidance is a relief to many companies that were concerned that the Tax Cuts and Jobs Act amendments to Section 274 to disallow expenses for entertainment, amusement or recreation might have applied to all situations where the business paid for a customer’s meal. Pursuant to changes, keep the following in mind:
Typical “quiet business meals” with clients or customers remain 50-percent deductible
The cost of food at an entertainment venue is 50-percent deductible as long as it is separately billed and not included in the price charged for the entertainment
Meals for employees on business travel remain at 50-percent deductible
Meals provided to employees for the employer’s convenience are now 50-percent deductible; previously they were 100-percent deductible
Office parties and picnics remain 100-percent deductible
Employees with business meal expenses that are not reimbursed by the employer can no longer claim them as a miscellaneous itemized deduction on their personal income tax returns
TAKE ACTION
In light of the new guidance, taxpayers should review their payments classified as nondeductible entertainment and change supportable food and beverage charges to 50-percent deductible. The procedures for tracking and documenting entertainment, food and beverages should be revisited in order to distinguish between 100 percent, 50 percent, and nondeductible amounts. Taxpayers should also request that vendors separately state the charge for food and beverages to ensure that they are eligible for the business meal deduction.