Delicious Deductions – IRS Provides Guidance on Tax Treatment of Meals and Entertainment
You may recall that the “Tax Cuts and Jobs Act” (TCJA) last year eliminated the deduction for entertainment expenses incurred after December 31, 2017 (these had been 50% deductible), but meals were not changed by TCJA and remain at 50% deductible (please click here for our earlier Sikich article on this topic). There was however, uncertainty as to what happens with meals if some entertainment was also involved in the function. The IRS issued Notice 2018-76 on October 3, 2018 (please click here for a copy of this Notice 2018-76) dealing with how to handle the tax treatment of business meals.
IRS Menu Provides Five Courses for Meals to be 50% Deductible
The IRS indicated it plans to issue regulations on the matter, but for now, taxpayers can rely on the guidance provided in Notice 2018-76. For meals to be 50% deductible, Notice 2018-76 states the following must be met:
- 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; and
- 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 disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Deductible Meals – IRS Scenarios
The key factor the IRS provided in this Notice 2018-76 is that business meals can remain 50% deductible if the cost of meals (food and beverage) can be identified and separately determined from any entertainment cost. Here are two examples the IRS offered in Notice 2018-76:
Example 1. Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B. The baseball game is entertainment as defined in the regulations and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the Section 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
Example 2. 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 the regulations, 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 Section 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.
Key Takeaway – Application
As noted above, the IRS will permit meals to be 50% deductible, provided the taxpayer can document and identify the cost of meals separately from the entertainment cost. If the entertainment and meals are lumped together in one charge, then no 50% deduction is allowed for the meals. Other suggestions:
- Businesses should begin documenting these costs now and track these separately in their books and records. Separate general ledger accounts should be maintained for expenses that are 100% deductible; 50% deductible; and 0% deductible. The meal portion of any expenditure should be separately listed and documented.
- Further, businesses should go back to the start of the year and see what documentation is available to split out the costs for any meals and separate these from any entertainment expenses. This would apply for any expenditures incurred after December 31, 2017, regardless of the company’s fiscal year. Then categorize these expense into the 100/50/0 % categories as spelled out in Notice 2018-76.
We will provide further updates as they unfold. Please contact your Sikich tax advisor if you have any questions.