IRS Clarifies Issues on Guidance for Deducting Meals & Entertainment
The IRS has finally issued additional guidance concerning new and altered legislation for deducting business meals and entertainment (IRS Notice 2018-76)- drastic changes in this area caused shock across the business world after they were announced in the Tax Cuts and Jobs Act (TCJA) of December 22nd, 2017. This was a predicament, to say the least because the new tax language for entertainment deductions was so unclear that a virtual standstill was imposed on all industries who never thought twice about the deduction stipulations.
There was no disagreement here among professionals: the new laws are (now, hopefully, were) vague and purposely confusing at their very, very best. Dubbed the “Don’t Eat the Lobster just yet” dilemma prior to the IRS’ recent updates, whether or not ordering the lobster is acceptable or not has now been addressed. Let’s take a look at the newly unleashed transitional directives on how meals and entertainment can be accounted for in the business world.
Prior to the ratification of the TCJA, the United States tax code had stringent regulations surrounding meal, amusement and entertainment business deductions. Exceptions were liberally available to the prohibition, however. Other than stating that businesses are permitted to deduct necessary and regular costs incurred during the same tax year in which they were incurred, the TCJA’s policy is deceiving in that it initially appeared to not to be as strict because there are no blanket provision against deductions.
- Deductions for food may be taken if they are not considered lavish or extravagant considering the occasion
- The employee, or employer, has a noticeable presence when food or beverage intended for deduction is consumed
- With exceptions, beverage and food deductions cannot be more than 50 percent of the total allowable expense
Some Well-needed Definitions
Section 1.274-2(b)(1)(i) of IRS regulations generously expands on the definition of “entertainment,” which is not new. Entertainment includes, but is not limited to that entertainment during or at:
- Country Clubs
- Cocktail Lounges
- Sporting Events
- Athletic Clubs
One very important caveat here is that entertainment can include those activities pertaining only to the taxpayer and his or her family- think a family suite or a rental car. If the new regulations make anything crystal clear, it’s that “entertainment” is not to be interpreted as solely entertainment for others; also crystal clear is the nature of a taxpayer’s trade. Here’s a quick example- attending a football game would meet the criteria for entertainment set by the IRS, but if I was a professional scout, my attendance at a game would be inappropriate in a professional capacity. The 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.
Of note is one remarkable fact: The TCJA did not alter any definitions here- the definition of entertainment remains the same. Where things get dicey, however, is whether the offering and providing of food and beverages is considered entertainment, particularly if food and beverages were linked to an activity that could potentially be considered entertainment. Let’s embark on the interesting, and complicated, journey of deciphering food and drinks and their context within IRS legal boundaries.
Entertainment Events and Corresponding Food & Drinks
The TCJA failed to address the precise circumstances under which the provision of food and beverages might constitute deductible entertainment. Nonetheless, the legislative history in the TCJA explains that taxfilers can continue to normally deduct 50% of the food and beverage expenses associated with operating their services or businesses. Prior law, for the record, deemed that one could deduct 50% of entertainment, amusement or recreation expenses, assuming those costs were directly related to your business or trade. With the TCJA, as it was ratified in its original form, there is absolutely no deduction for items generally considered to constitute entertainment.
Newsflash! The IRS Notice 2018-76 explains that taxpayers are permitted to deduct 50% allowable business should:
- Food and beverage expenses are provided to furnish current or potential company clients or similar business contacts
- Such expenses are ordinary and necessary and paid or incurred during the tax year in which a trade or business is carried on
- The expense is in no may lavish or extravagant
- The taxpayer on locale during food or beverages consumption
- If an instance is that food and beverages are provided during or at an entertainment activity, at a distance away, the food and beverages are purchased entirely separately from the entertainment, or separated acceptably on the invoice
It’s Not Over Yet
The IRS has hinted at issuing more regulations on this massive conundrum of an issue down the line. However, until more proposed legislation is put into effect, taxpayers are left relying on current guidelines regarding treatment of expenses for company meals. Furthermore, keep an eye out for more, but entirely, separate regulations pertaining to the treatment of expenses for meals, food and beverages furnished primarily to employees on the employer’s respective premises.
Thomas Huckabee, CPA of San Diego, California recognizes that many options exist when it comes to choosing the right CPA. And, the right CPA is essential and needed to guide your business and you through understanding and enrolling in a health care program, particularly in light of the Tax Cuts and JOb Acts (TCJA’s) ratification. Operating a full-service accounting firm, Tom guides clients through the complicated process of meals and entertainment, so your tax opportunities are optimized.