In REG-100814-19, the IRS issued proposed rules clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. It noted that the proposed rules generally follow Notice 2018-76 with a few changes or clarifications in response to comments. It also said taxpayers may rely on the guidance in the notice until the regulations are finalized. According to the IRS, when it issued the notice, the TCJA amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but they do not address the deductibility of expenses for business meals. This omission created much confusion in the business community until the IRS issued the notice.
Sec. 274(k), which was not amended by the TCJA, does not allow a deduction for any food or beverage expense unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food and beverages are furnished. Sec. 274(n)(1), which was amended by the TCJA, generally provides that the amount allowable as a deduction for any expense for food and beverages cannot exceed 50% of the amount of the expense that otherwise would be allowable.
Under the proposed rules, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when 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 when the food and beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they 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 proposed regulations further clarify the requirement in No. 4 that the food and beverages be provided to a current or potential business contact, after a commenter noted that the term “potential business contact” could apply to anyone, by following the definition of business associate in current Regs. Sec. 1.274-2(b)(2)(iii). Therefore, the food and beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.” In addition, the proposed rules apply this standard to the deduction of food and beverage expenses generally by including employees as a type of business associate, making the standard applicable to employer-provided meals as well as to situations in which a taxpayer provides meals to both employees and nonemployee business associates at the same event. The IRS is requesting comments on this standard.
The IRS will not allow the entertainment disallowance rule in No. 5 to be circumvented through inflating the amount charged for food and beverages. In implementing the requirement that the food and beverages amount not be inflated to cover disallowed entertainment expenses, the proposed regulations add, in response to a comment, that the amount charged for food and beverages on a bill, invoice, or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items. In another rule, the IRS stated that, unless the amounts are billed separately or separated on the same invoice, no deduction is allowed, prohibiting any attempt at allocation.
The IRS requests comments on all aspects of the regulations and is holding a public hearing in Washington on April 7 if it receives outlines of topics to be discussed.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.