IRS Issues Final Guidance for Deductibility of Meals and Entertainment Business Expenses

IRS Issues Final Guidance for Deductibility of Meals and Entertainment Business Expenses

Background information
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, drastically changed the deductibility of meals of entertainment expenses for federal income tax purposes. Now, after more than two years of issuing temporary guidance, the IRS has issued final regulations to clarify some lingering questions.

Summary of the effect of final regulations on deductions for meals
On September 29, 2020, the IRS issued final regulations clarifying the disallowance of certain business expenses for entertainment. One of the main issues addressed in this issuance is the severability of meal expenses from entertainment expenses when both are being consumed together.

Prior to the enactment of TCJA, business related entertainment expenses were previously allowed a 50% deduction by the taxpayer. For example, a taxpayer could purchase tickets to a sporting event to discuss a proposed business deal. The tickets, as well as the meals and drinks that were purchased at the event - if they were not deemed to be lavish or extravagant - could be deducted at 50% of cost on the taxpayer’s tax return.

TCJA reclassified entertainment expenses incurred after January 1, 2018 to be 100% non-deductible. As a result, it is likely you were previously advised to separate the meals and entertainment expenses into two different accounts when keeping the books for your tax accountant.

Using the same example above, the taxpayer could not deduct any of the costs of the tickets on the taxpayer’s tax return. This led to questions about the meals purchased at the game.

The final guidance adds a new Regulation Section 1.274-11 which adopts the proposed regulations that food and beverages can be separated from an entertainment expense if:

  • the food and drinks are purchased separately from the entertainment
  • the food and drinks are stated separately from the costs on one or more bills, invoices, or receipts

Other areas addressed in this issuance include expenses treated as compensation to an employee and break room snacks and drinks provided to the employees. Something to keep in mind is that expenses are fully deductible if the expenditure is treated as employee compensation for purposes of withholding and are reported that way. Snacks and drinks provided to employees free of charge were considered de minimus expense items and were fully deductible. In the new rules and final regulations, these are now to be treated as meals and are limited to the 50% deductibility rules.

In conclusion, it can get complicated at times to determine what should be treated as entertainment expenses and what is eligible to be treated as meals. As always, we encourage our clients to keep thorough documentation for items posted to these accounts. You are encouraged to call or schedule a meeting with your Herbein accountant to discuss specific scenarios.

For additional information contact us at Article contributed by Benjamin Rusnak.