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Clearing up the confusion related to Business Meals and Entertainment deductions

Clearing up the confusion related to Business Meals and Entertainment deductions

Traditionally, the IRS has allowed a deduction of up to 50% of qualifying meals and entertainment expenses for business purposes.  When the Tax Cuts and Job Act (TCJA) was originally passed, it seemed to many that both the business meal expenses and entertainment deductions were eliminated.  However, the IRS issued guidance (Notice 2018-76) clarifying the deductibility.

Business Meals:
Under prior law, taxpayers could deduct 50% of meal expenses that directly met the related or business discussion exceptions under Section 274 of the Internal Revenue Code.  When the TCJA was passed, there was some confusion regarding the business meals deduction.  After the IRS clarified the deductibility of meals and entertainment, the IRS issued Notice 2018-76 to provide some guidance on the deduction.  The notice states, “Allowable meal expenses remain deductible, subject to the 50 percent limitation in Section 274(n)(1).”  Therefore, the meal deduction remains intact post-TCJA if the following requirements outlined in Notice 2018-76, are met:

  1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable 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.

With the provision provided by Notice 2018-76, the 50% deduction for business meals will still be effect in 2018 and later years.

Entertainment:
Prior to 2018, businesses could deduct up to 50% of entertainment expenses directly related to the operations of the business.  However, unlike the business meals deduction, the deduction for entertainment, amusement, or recreation expenses was generally eliminated by the TCJA.  The Treasury defines entertainment as the following, “an activity of a type generally considered to constitute entertainment.”  Examples of entertainment provided by the Treasury include entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, and sporting events.  As with much of the TCJA, there was some confusion as to what exactly “is a deductible and non-deductible expense”.

Once again, Notice 2018-76 comes into play.  The Notice clears up some initial confusion regarding the entertainment deduction.  Any expense that falls under the category of “entertainment” as listed above is considered non-deductible.  However, “entertainment” does not include the following:

  1. Dinner money provided by an employer to employee working overtime;
  2. A hotel room maintained by an employer for lodging of employees while in business travel status; and
  3. An automobile used in the active conduct of trade or business even though also used for routine personal purposes such as commuting to and from work.

This provides some clarity for the entertainment deduction, but there still seems to be some confusion relating to meals provided during entertainment events.

Meals During Entertainment
Generally, meals that are provided during entertainment events are allowed and deductible if the following conditions are met:

  1. The food and beverages are purchased separately from the entertainment;
  2. The cost of the food and beverages is stated separately from the cost of the entertainment on one or more, bills, invoices, or receipts. 

Following the guidelines set forth in Notice 2018-76 will contribute to taking full advantage of the new business meals and entertainment deduction rules set forth by the TCJA.

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For more information regarding the business meals and entertainment deduction, please contact a member of the Herbein tax team or email us at info@herbein.com.

Article written by Richard M. Staniszewski.