One of the lingering areas of uncertainty resulting from the passage of the Tax Cuts and Jobs Act (TCJA) is the change to the meals and entertainment expense deduction. Prior to the TCJA, taxpayers could generally deduct 50 percent of business-related meal and entertainment expenses, with some exceptions. Following the passage of the TCJA, entertainment, amusement, and recreational expenses paid or incurred after December 31, 2017 are no longer deductible. As a result, common entertainment expenses such as tickets to sporting and theater events as well as golf club dues are no longer deductible if paid or incurred after December 31, 2017.
Now that it has become clear that entertainment expenses are no longer deductible, the focus has shifted to food and beverage expenses. Are these still deductible? Are food and beverages provided during an activity considered to be entertainment deductible? Or are they tainted by their connection to the entertainment activity and, as such, nondeductible as well?
In response to these and other questions, the Treasury and IRS released transitional guidance in the form of Notice 2018-76, which confirmed that taxpayers may generally continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business. In addition, the Notice included three examples illustrating the appropriate deduction for a food and beverage expense incurred while attending an entertainment event.
Example 1
Business meal purchased separately from entertainment. Taxpayer A takes B, a business contact, to a baseball game. While at the game, A buys hot dogs and beverages for A and B. The Notice confirms that the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and beverages is not an entertainment expense and, as a result, A may deduct 50 percent of the cost of the hot dogs and beverages.
Example 2
Cost for business meals commingled with entertainment, not separately stated or purchased. Taxpayer C takes D, a business
contact, to a basketball game. Taxpayer C purchases tickets for C and D to attend the game in a suite. They have access to food and beverages in the suite, and the cost is included with the tickets. The Notice provides that the full cost, including the food and drink, is a nondeductible entertainment expense.
Example 3
Business meals separately states from entertainment. Assume the same facts as Example 2, except that the invoice for the basketball suite tickets separately states the cost of the food and beverages. Consistent with Example 2, the cost of the suite tickets would be an entertainment expense and thus nondeductible by C. However, the cost of the food and beverages, which is stated separately on the invoice, is not an entertainment expense and would be deductible by C, subject to the 50 percent limitation.
Future Guidance
The Treasury and IRS are aware that the guidance provided by Notice 2018-76 does not address all of the questions raised by taxpayers and tax professionals. As a result, they have requested comments for future guidance to further clarify the treatment of business meal expenses and entertainment expenses, and this guidance will appear in the form of proposed regulations. Until the proposed regulations are effective, taxpayers may continue to rely on the guidance included in Notice 2018-76.
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